Grayscale Investments LLC moved closer to launching a spot-based Bitcoin exchange-traded fund in the US, a potential watershed moment in the cryptocurrency industry’s quest to tap billions of dollars from everyday investors.
A three-judge appeals panel in Washington on Tuesday overturned a decision by the US Securities and Exchange Commission to block the ETF, which would be tied to the spot Bitcoin price.
The ruling marks a major legal win for the crypto industry and sent the price of Bitcoin surging by as much as 7%. The Grayscale Bitcoin Trust rallied as much as 21%.
The SEC, which said that it was reviewing the decision, could still fight it.
Grayscale has said converting to an ETF would help it unlock about $5.7 billion in value from the $16.2 billion trust by making it easier to create and redeem shares. More broadly, the crypto industry has long viewed the launch of an ETF based on the cryptocurrency itself, rather than futures, as significant milestone.
In June 2022, the SEC rejected Grayscale’s conversion proposal arguing that an ETF based on Bitcoin lacked adequate oversight to detect fraud. Grayscale sued to overturn the decision accusing the SEC of discriminating against its product, while approving similar Bitcoin futures ETFs.
‘Arbitrary and Capricious’
“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” wrote Judge Neomi Rao.
In a statement, Grayscale called the decision “a monumental step forward for American investors.”
“There’s huge optimism baking into the market right now,” Owen Lau, analyst at Oppenheimer & Co, said in a phone interview.
In its opinion, the court said that Grayscale “advanced substantial evidence” that its product was similar to Bitcoin futures ETFs approved by the SEC, the opinion read. The underlying assets of both types of products are closely correlated and the surveillance sharing agreements with the Chicago Mercantile Exchange are “identical.”
Grayscale sought to create an ETF because the trust’s closed-end structure doesn’t allow for investors to redeem shares when prices fall, causing the trust to trade at steep discounts to its underlying Bitcoin. As an ETF, it could create and redeem shares to keep up with changing demand.
During a hearing on the case in March, the judges grilled the SEC about its decision and seemed to side with Grayscale’s argument that the underlying markets for spot Bitcoin and Bitcoin futures pose the same risk for fraud and manipulation.
The case is Grayscale v. SEC, 22-1142, US Court of Appeals for the District of Columbia Circuit.