Court sides with Grayscale in closely watched Bitcoin ETF case

The U.S. Court of Appeals for the DC Circuit issued its opinion in Grayscale v. SEC on Tuesday, ruling that the agency was unreasonable to deny the crypto giant permission to launch a Bitcoin ETF.

The ruling, which came after the SEC rejected crypto giant Grayscale’s latest bid to launch a Bitcoin ETF last October, opens the door to a potentially huge amount of new capital flowing into crypto markets.

The court’s ruling turned on the SEC’s inconsistent of applications for Bitcoin futures ETFs, which it has approved in the past, and for regular ETPs or exchange traded products, which Grayscale had sought.

“The Commission failed to reasonably explain why it approved the listing of two bitcoin futures ETPs
but not Grayscale’s similar proposed bitcoin ETP. Without such an explanation, inconsistent treatment of similar products is arbitrary and capricious,” wrote Circuit Judge Neomi Rao.

While retail consumers and hedge funds have invested in Bitcoin for more than a decade, pension funds and other big players have largely stayed on the sidelines, in part because corporate by-laws restrict what they may invest in on behalf of their customers.

The introduction of a Bitcoin packaged in the familiar financial wrapper of an ETF is widely expected to wipe away such legal and reputational concerns among conservative investors, and lead to massive boost in liquidity for the crypto markets.

The lawsuit over began last October when Grayscale sued the agency after it rejected the company’s most recent application to launch a Bitcoin ETF. Grayscale’s claim focused on the disparate treatment of ETFs that package Bitcoin futures contracts, which the agency has allowed since 2021, and ones for spot market Bitcoin, which it has repeatedly denied.

At a hearing in March, Grayscale argued the SEC’s purported justification for denying its application—that there was a risk the underlying Bitcoin market could be manipulated—was unreasonable since the same concerns could apply to the futures market.

The ruling does not mean the SEC has to immediately implement the ruling. While it could appeal the decision, it is also facing applications for Bitcoin ETFs from traditional financial firms like BlackRock and Fidelity, which makes it more likely the agency will simply accept the court ruling and approve applications in coming weeks.

This story will be updated with more details shortly.

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