Grayscale Investment, the Connecticut-based crypto asset manager, has scored a legal victory over the US Securities and Exchange Commission (SEC). Today (Tuesday), the US Court of Appeals for the District of Columbia Circuit ruled that the SEC’s rejection of the company’s proposal to convert its Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin (BTC) exchange-traded fund (ETF) was “arbitrary and capricious.”

Grayscale Wins Legal Challenge

A spot BTC ETF tracks the current market price of Bitcoin. The instrument enables investors to get indirect exposure to BTC.

In October 2021, Grayscale, a subsidiary of the Digital Currency Group, applied to the SEC to list its ETF on the stock exchange, NYSE Acra. However, in June last year, the securities regulator denied the application, noting that the proposed ETF “was not designed to prevent fraudulent and manipulative acts and practices.” Grayscale subsequently launched a legal challenge against the regulator.

The SEC turned down Grayscale’s proposal despite approving two Bitcoin futures ETFs, Teucrium Bitcoin Futures Fund and Valkyrie XBTO Bitcoin Futures Fund, in April and May 2022, respectively. Furthermore, the securities watchdog judged the surveillance-sharing agreement between the funds and the Chicago Mercantile Exchange (CME) as satisfactory.

However, Grayscale’s proposal was denied despite the fact that NYSE Arca has the same surveillance-sharing agreement with the CME. Instead, the SEC concluded there was a risk that trading in Grayscale’s ETF would have a “predominant influence on prices” in the CME bitcoin futures market.

In a decision reached on Tuesday, a panel of judges at the appellate court criticized the SEC for failing to explain why it offers “different treatments” for similar products. The court, therefore, ordered the regulator to “vacate” the order against Grayscale.

“NYSE Arca presented substantial evidence that Grayscale is similar, across the relevant regulatory factors, to bitcoin futures ETPs,” Circuit Judge Neomi Rao explained in a court filing. “The Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP.”

Judge Rao added: “In the absence of a coherent explanation, this, unlike the regulatory treatment of like products, is unlawful. We therefore grant Grayscale’s petition for review and vacate the Commission’s order.”

Commenting on the court ruling, Michael Sonnenshein, the CEO of Grayscale, in a post on X (formerly Twitter), noted that the firm’s legal team is “actively reviewing” the court’s ruling. Similarly, a spokesperson for the SEC told Reuters that the regulatory authority is evaluating the court’s stance to determine its next move.

🚨 JUST IN 🚨

The D.C. Circuit ruled in favor of @Grayscale in our lawsuit challenging the SEC's decision to deny $GBTC's conversion to an ETF!

Thank you to everyone who has been on this journey with us, especially our investors. We are grateful for your support and…

— Sonnenshein (@Sonnenshein) August 29, 2023

Is the First Spot BTC ETF Coming?

Over the last few years, several firms have applied for a spot BTC ETF with the SEC. However, the regulator has rejected all the applications, citing fraud concerns.

Despite this, the crypto industry in recent months has been hopeful that trading in the instrument will be approved. In June, an application for approval of the ETF by BlackRock, the world’s largest asset manager, sparked a wave of similar submissions from other companies in the sector, Finance Magnates reported.

With the new order from the appellate court, the United States may be about to get its first spot BTC ETF. However, it is important to point out that the order only instructs the SEC to review its decision on the proposed ETF. It is possible that the regulator will find another fault with Grayscale’s application.

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