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Court Sides With Grayscale Over SEC in BTC ETF Case — Tides Changing in Cypto’s Favor

Last Updated August 30, 2023 2:19 PM
Omar Elorfaly
Last Updated August 30, 2023 2:19 PM

Key Takeaways

  • US judges ruled SEC must consider Grayscale’s ETF application.
  • Ruling may push SEC to consider all ETF applications.
  • Financial institutions regain optimism over spot ETFs future. 

US judges ruled  in favor of Grayscale against the US Securities and Exchange Commission (SEC) in a lawsuit where the institution claims the regulating body denied its ETF application without providing clear reasons.

“The Commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decisionmaking,” says the court in a filing by Judge Neomi Rao of the D.C. Court of Appeals.

As a result, Bitcoin saw a sharp 6% increase in price to $27,858 after the court decision.

Grayscale’s ETF Application

Grayscale already had its Bitcoin Investment Trust (GBTC) approved in September 2013 as a private placement to accredited investors and, then, received FINRA approval for eligible shares to trade publicly. The trust enabled investors to buy shares in the company that are directly affected by variations in Bitcoin prices.

In October 2017, Grayscale applied to convert GBTC to a Bitcoin spot ETF but it then voluntarily withdrew its application after receiving a slew of negative remarks from the SEC.

Grayscale then filed an amended application in 2021. However, the authority took more than a year before rejecting it. It said it failed to provide evidence that it had sufficient anti-money laundering and anti-market manipulation measures in place.

As a result, in 2022, Grayscale filed a lawsuit against the SEC, citing that the commission had already approved exchange-traded products that hold bitcoin futures contracts, refusing to accept any spot ETFs. It accused the agency of having “acted arbitrarily and capriciously.”

The three-judge panel of the District of Columbia Court of Appeals ruled that SEC failed to provide clear reasoning when rejecting Grayscale’s ETF application and must now review its decision.

The ruling doesn’t immediately mean that the SEC must approve Grayscale’s application. 

US market regulator has now 45 days to appeal the decision. Otherwise, the SEC would then have to provide a detailed response to all ETF applications filed by financial institutions for similar products.

Grayscale CEO, Michael Sonnenshein, told Reuters  that this is a “historic milestone for American investors.”

Revived Hopes For Spot ETF Applications

As a result of the ruling, the SEC must now carefully consider all spot ETF applications filed by financial institutions, including BlackRock, and Cathie Wood’s ARK Invest.

Many of these financial institutions opted to refile their spot ETF applications with the regulating body, naming Coinbase as a surveillance partner in an attempt to meet the SEC’s anti-money laundering conditions.

Greg Moritz, Chief Operating Officer at AltTab Capital, told CCN “It’s excellent that the judge in the Grayscale vs. SEC case was able to see the obvious correlation between Bitcoin futures and spot price.

Products like Grayscale’s holdings have converted to ETFs in other commodity markets, and it makes no sense to treat crypto differently. Rules for financial markets need to be based on data, not arbitrary and capricious sentiment toward a legitimate and growing asset class.”

In the crypto sector, investors anticipate a regulatory response to ETF applications, potentially transforming the market. This could open doors for mainstream investment via Wall Street giants.

Matteo Greco, Research Analyst at the publicly listed digital asset and fintech investment business Fineqia International, told CCN “Undoubtedly, this development is a strong positive signal for the market. Indeed, BTC immediately bounced over $27,500 and the Grayscale Bitcoin Trust (GBTC) discount narrowed from about 25% to 16%. However, final decisions on when and if Grayscale will be able to list its product as an ETF are yet to be made.

The court decision is significant but doesn’t immediately alter the situation. Grayscale obtained the chance of seeing its filing re-evaluated by the SEC as the causes of rejection did not seem fair to the judge. It doesn’t mean that now Grayscale will be 100% able to list a spot Bitcoin ETF, nor that this will happen in the future.”

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