In October 2021, Grayscale filed for an application to convert its Grayscale Bitcoin Trust into an ETF. However, the Securities and Exchange Commission (SEC) rejected the proposal, which prompted Grayscale to take the regulatory agency to court. On August 29, The US District of Columbia Court of Appeals ruled in favor of Grayscale. The court surmised that the SEC was wrong in rejecting the application.
The court’s landmark decision was well received by the crypto industry, with Bitcoin (BTC) immediately surging more than eight percent.
This case has been closely watched by investors, since a spot Bitcoin ETF would allow exposure to the number one digital asset without actually owning it. One of the barriers to BTC ownership is the complex nature of maintaining a crypto wallet, which involves safeguarding seed phrases. A spot ETF would put the burden of safeguarding the underlying asset on the issuer, which in this case is Grayscale.
Timeline: From Grayscale Bitcoin Trust’s Creation to Court Decision
The Grayscale Bitcoin Trust or GBTC was created in September 2013. It allows investors to have exposure to Bitcoin without holding it directly. GBTC was a private placement to accredited investors but it became publicly traded in 2015. It is traded at the OTCQX, a marketplace for over-the-counter trading of stocks.
In October 2021, Grayscale filed a petition to convert the 600,000 Bitcoin in its custody to a Bitcoin exchange-traded fund (ETF). The SEC denied the application in June 2022. The financial regulator argued that the proposal failed to meet consumer protection requirements to prevent manipulation and fraudulent practices.
The SEC also said that the NYSE ARCA, the proposed marketplace for the ETF, does not have an agreement to monitor the BTC price for manipulation with another regulated marketplace that trades Bitcoin.
Below is a timeline of events.
What Did the Judge Say?
Before the court decision, Judge Neomi Rao was already wondering why the SEC approved futures Bitcoin ETFs while rejecting spot applications.
“It seems to me that the commission really needs to explain how it understands the relationship between Bitcoin futures with the spot price of Bitcoin… one is essentially derivative of the other. They move together 99.9% of the time. So where is the gap in the commission’s view? “
Judge Neomi Rao
Judge Rao’s sentiment is the same as Grayscale’s. Both the spot and future BTC ETFs have the same underlying asset. There should be no reason to discriminate against any spot BTC ETF application.
According to a Reuter report, the panel of judges said that Grayscale showed that the proposed spot ETF is similar to approved Bitcoin futures ETFs because the underlying assets are “closely correlated”. The court also noted that the surveillance sharing agreement with the CME (Chicago Mercantile Exchange) is “identical and should have the same likelihood of detecting fraudulent or manipulative conduct in the market for bitcoin.”
The court also ruled that the SEC was “arbitrary and capricious” since it failed to explain why Grayscale owning BTC rather than BTC futures affected the CME’s ability to detect fraud.
How Does the Grayscale Win Affect the Market?
It is a clear win for Grayscale and a painful slap on the SEC’s face. However, the SEC has 45 days to appeal the decision. As far as the crypto community is concerned, the court has done its job of exposing the regulatory agency’s discriminatory ways of handling digital assets.
This decision coupled with the Ripple Labs victory is a clear indication that the SEC is wrong in the way it is handling the crypto space.
We also have to remember that there are several financial giants, which include BlackRock and Fidelity Investments, that have applied for a spot Bitcoin ETF. The court’s decision gives their application a higher chance of being approved. This could probably catapult BTC’s price to the moon.
The court has always been seen as the last option to get justice and there is no doubt that Grayscale and the crypto community are happy with the result. The court has proven that it is an unbiased adjudicator, an institution that bases its decision on facts and not on whims.
