Investors and applicants interested in spot Bitcoin exchange-traded funds (ETFs) are keeping a close eye on the ongoing court case between Grayscale and the U.S. Securities and Exchange Commission (SEC
On June 29, 2022, the U.S. SEC rejected Grayscale’s application to convert the Grayscale Bitcoin Trust to a spot Bitcoin ETF. The same day, Grayscale filed an appeal in D.C. court challenging the SEC’s decision.
The court’s decision on the lawsuit could dictate the fate of the string of spot Bitcoin ETF applications filed last month.
Grayscale claims the SEC acted “arbitrarily and capriciously”
The crux of Grayscale’s argument is that the SEC acted “arbitrarily and capriciously” in rejecting spot Bitcoin ETF applications, especially considering it had already approved Bitcoin futures ETFs. The SEC violated the Securities Exchange Act with its “unfair discrimination” against spot Bitcoin ETF issuers, Grayscale alleges.
In other words, Grayscale believes that the spot and futures Bitcoin ETFs pose similar risks and should be treated equally. Moreover, both spot and Bitcoin futures ETFs are priced based on the same underlying spot markets — another reason why they should be treated equally, Grayscale argues.
Grayscale delivered its final oral arguments in the case on March 7. The SEC that day argued that spot and Bitcoin futures ETFs have a correlation, but that correlation does not equate to causation. The crux of the SEC’s argument is that spot Bitcoin ETFs are more vulnerable to manipulation and fraud because the underlying spot market remains unregulated. However, the regulated Chicago Mercantile Exchange, where Bitcoin futures ETFs trade, has sufficient safeguards against fraud and manipulation.
Looking forward
The court decision, regardless of the outcome, will be crucial for all those looking to issue spot Bitcoin ETFs in the U.S. If Grayscale wins, the SEC could appeal the decision in a higher court. If Grayscale loses, the firm could call for an “en banc” hearing, which is rare — in such hearings, all judges of the D.C. Circuit will weigh in on the case. Or, Grayscale could appeal the decision in the Supreme Court.
Given that many market analysts are optimistic about the approval of spot Bitcoin ETF applications, the court ruling, in this case, could significantly influence the outlook for such ETF issuers.
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