Grayscale scores big court win against SEC over bitcoin ETF

Asset management firm Grayscale has won a landmark court ruling against US regulators as it seeks to launch a US-listed exchange traded fund tracking the price of flagship cryptocurrency token bitcoin.

A federal appeals court in Washington DC on Tuesday ruled the Securities and Exchange Commission was wrong to reject Grayscale’s application to convert its flagship vehicle — Grayscale Bitcoin Trust — into an ETF.

The decision puts major pressure on Gary Gensler, the SEC chair, who has issued a blitz of enforcement actions against crypto industry players this year. The regulator has cases pending against Nasdaq-listed crypto exchange Coinbase as well as Binance, the largest crypto exchange in the world.

The price of bitcoin shot up roughly 6 per cent on Tuesday after the ruling. It is up 65 per cent year to date. Shares of Coinbase were up more than 13 per cent.

The Grayscale lawsuit focused narrowly on the question of whether the money managers could offer a spot bitcoin ETF that would expose retail investors to the real-time price of bitcoin. While the SEC has previously given the green light to ETFs based on bitcoin futures, the regulator has argued that bitcoin trades on unregulated exchanges and can be prone to market manipulation.

“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” Judge Neomi Rao wrote for a three-judge panel on the District of Columbia Circuit Court of Appeals, which vacated the SEC’s decision to block the spot ETF.

The SEC said it was reviewing the court’s decision. The regulator could appeal to the full federal appeals court or the Supreme Court, but it is not clear whether it will chose to do so.

Despite the SEC’s tough stance on the industry, demand for a spot bitcoin ETF has grown, and more traditional players have attempted to break into the sector. The SEC is considering a half-dozen other proposals to launch spot bitcoin ETFs from BlackRock, WisdomTree and Fidelity, among others.

“Based on the court decision, this is a close to fatal blow for the SEC’s decision that it cannot allow these products to launch,” said Jeremy Senderowicz of law firm Vedder Price. “If this decision stands, then it rejects the SEC’s central basis for rejecting every spot bitcoin ETF for the last several years.”

“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 spokesperson Jennifer Rosenthal said.