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(Article from Registered Funds Regulatory Update, October 2023)

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On August 29, 2023, the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of Grayscale Investments, LLC in connection with the crypto-asset manager’s bid to convert its over-the-counter $16.2 billion Grayscale Bitcoin Trust to a Bitcoin ETF listed on the NYSE’s Arca market. The SEC had previously rejected the spot Bitcoin ETF’s listing application, stating that the product was not “designed to prevent fraudulent and manipulative acts and practices.” Although the SEC has permitted the listing of Bitcoin futures ETFs, it has consistently rejected applications for spot Bitcoin ETFs to trade on traditional regulated securities exchanges. In June 2022, Grayscale sued the SEC and filed a petition for the Court to review the SEC’s order, claiming that the SEC acted “arbitrarily and capriciously” by denying its application and approving materially similar listing applications for Bitcoin futures ETFs.

According to Court filings, the SEC did not sufficiently explain its decisions to reject the listing applications for spot Bitcoin ETFs while approving those for Bitcoin ETFs that invest in cryptocurrency futures. The listing applications for Bitcoin futures ETFs were approved based on the use of a surveillance-sharing agreement between a related and “regulated market of significant size” to buy or sell Bitcoin futures at pre-agreed prices to protect against market manipulation. Although Grayscale and NYSE Arca also proposed using surveillance-sharing agreements, the SEC did not agree that it deserved the same regulatory treatment. The Court stated that the inconsistent treatment of investment vehicles that provide exposure to Bitcoin was unlawful absent a coherent explanation and granted Grayscale’s petition for review and subsequently vacated the SEC’s order denying the listing application. 

Although its being called a landmark decision by some within the industry, the decision does not guarantee the approval of Grayscale’s listing application. Not only does the SEC have 45 days to appeal the decision but the SEC could still reject the application on other grounds. However, the Court’s decision could factor into the SEC’s decisions on the listing of cryptocurrency-related investment vehicles and pave the way for spot Bitcoin ETFs at some point in the future.

Grayscale Investments v. SEC, No. 22-1142 (D.C. Cir. Aug. 29, 2023).