A federal appeals court ruled that the SEC was wrong to reject Grayscale’s application to convert its flagship Grayscale Bitcoin Trust, which the SEC approved in 2015, and which holds more than $15bn in bitcoin, into an ETF. The SEC has allowed bitcoin futures ETFs since October 2021 but contended that spot funds were prone to manipulation, since crypto tokens trade on largely unregulated markets.
Judge Neomi Rao wrote in the decision that the SEC’s denial was “arbitrary and capricious because the commission failed to explain its different treatment of similar products”.
“This is a monumental step forward for American investors, the bitcoin ecosystem, and all those who have been advocating for bitcoin exposure through the added protections of the ETF wrapper,” Grayscale said in a statement.
What happens next?
The SEC has 45 days to decide whether to abide by the decision, ask the full federal appeals court in Washington to review it, or take an appeal straight to the Supreme Court. It said on Tuesday that it was reviewing the decision.
Lawyers said Grayscale would have to file a new application for its ETF. But there is no guarantee that it will be approved, despite the court’s decision — the SEC could reject it on other grounds.
Indeed, investors still seem to think that the Grayscale trust’s conversion could get gummed up. One reason Grayscale has long sought to convert its trust into an ETF is that trusts, unlike ETFs, often trade at a discount to their holdings. Even after Tuesday’s ruling, the Grayscale trust was still trading at a 20 per cent discount, a sign that investors are wary that a conversion will happen soon.
Financial reform group Better Markets suggested that the agency could address the court’s concerns another way — by cancelling bitcoin futures ETFs rather than approving new spot products. The ruling “does not change the fact that the bitcoin market is subject to fraud and manipulation or that an ETF would be a serious threat to investors”, said Dennis Kelleher, its chief executive.
What does this mean for other bitcoin ETFs?
The first European spot bitcoin ETF started trading earlier this month. In the US, there are more than a dozen other applications pending, including some from the largest US asset managers. All of them would face similar questions about preventing market manipulation and how to price the asset at the end of the trading day, lawyers said.
Even though Grayscale had successfully challenged the SEC’s decision, there was no legal guarantee that it would jump to the front of the queue for review, said Teresa Goody Guillén, a partner at BakerHostetler.