Blockchain & Crypto

Court Favours Grayscale Over SEC in Spot Bitcoin ETF Case

Despite the legal victory of Grayscale, it’s too early for spot Bitcoin ETF proponents to cheer

Court Favours Grayscale Over SEC in Spot Bitcoin ETF Case

The ruling of the US federal appeals court filed on Tuesday, Aug. 29, concluded that the Securities and Exchange Commission (SEC) was wrong to reject an application from Grayscale Investments to create a spot bitcoin exchange-traded fund.

To be precise, the investing company aims to convert its flagship $15bn-worth Grayscale Bitcoin Trust, which the SEC approved in 2015, into an ETF. The bid was made in early 2022, but the regulator rejected it last June. The explanation was that such such financial products are prone to fraud and manipulation, as they trade on unregulated exchanges.

However, Grayscale sued the SEC, alleging that the regulator violated the Administrative Procedure Act and the Securities Exchange Act of 1934 and discriminated between issuers of the two types of ETFs on an “arbitrary and capricious” basis.

After long legal struggle, a three-judge panel of the District of Columbia Court of Appeals in Washington agreed that SEC’s reasoning when denying Grayscale’s product was unjustified and not clarified properly. Hence, the Commission should review its decision.

The ruling caused great excitement in the crypto community. Bitcoin price surged seven percent to nearly $28,000.

However, the legal ruling doesn’t automatically mean the end of a legal battle or immediate approval of Grayscale spot Bitcoin ETF. The SEC now has 45 days to either abide by the decision, ask the full federal appeals court in Washington to review it, or appeal at the Supreme Court. The regulator’s decision is still unknown, so is the outcome of the Grayscale case.

Spot Bitcoin ETFs have lately topped the agenda of large investing funds. In June 2023, the largest investment company globally, BlackRock, applied for spot Bitcoin ETF. After the SEC found flaws in the original filing, the asset manager refiled the application, finalising a ‘surveillance-sharing agreement’with Coinbase, that enables bilateral surveillance-sharing between Nasdaq and the cryptocurrency exchange.

Fidelity Investments and Cathie Wood’s ARK Investment Management have also revised their spot Bitcoin ETF applications, updating them with new security features. Nevertheless, the SEC extended the decision deadline on a joint spot bitcoin ETF application from ARK/21Shares in August and sought public comment.

The latest court ruling is another stab at the SEC’s anti-crypto campaign. Earlier, the stablecoin issuer Ripple Labs has gained a partial legal victory in the lawsuit, where the court ruled that XRP is not a security when sold on digital asset exchanges to the general public. Nevertheless, the SEC is to appeal in this case, asking the judge to put the Ripple case on hold since multiple other pending court cases could be affected depending on the appeal’s outcome.

Whether the SEC will also appeal on the Grayscale-related court decision is still a question. If the regulator abides, many experts expect all the other spot Bitcoin ETF applications might be approved simultaneously.

Nina Bobro

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Nina is passionate about financial technologies and environmental issues, reporting on the industry news and the most exciting projects that build their offerings around the intersection of fintech and sustainability.