SEC Suffers Another Digital Asset Defeat in Court, Paving the Way for Reconsideration of Bitcoin ETF Applications

A favorable decision from the DC Circuit Court of Appeals helped Grayscale Investments hand the SEC its second defeat in court in as many months, following the partial victory of Ripple Labs over the commission in the Southern District of New York. The rare back-to-back defeats come as the SEC has sought to clamp down on the US crypto industry and, in that effort, may have overreached by rejecting applications for Grayscale’s spot Bitcoin-backed ETF on “arbitrary and capricious” grounds. The voiding of the SEC’s previous rejection, and the rationale underlying it, will make further rejections more difficult to justify and, ultimately, appears to bring the eventual listing of a spot BTC fund closer into view.

In a unanimous 3-0 decision, the panel of judges convened to issue an opinion on this case noted that the SEC failed to provide “a coherent explanation” for the ongoing rejection of Grayscale’s spot BTC ETF application that would not also apply to previously approved futures-based ETFs. That is a hugely positive development for Grayscale, as well as other potential sponsors of other spot BTC funds who would seem to have also been unfairly discriminated against in their filings.

Related Assets & ETFs: Bitcoin (BTC-USD), Grayscale Bitcoin Trust (GBTC), ProShares Bitcoin Strategy ETF (BITO) 

In a significant victory for the US digital asset industry, The DC Circuit Court of Appeals sided with Grayscale Investments in its suit against the Securities and Exchange Commission (SEC) yesterday. Grayscale is the sponsor of the Grayscale Bitcoin Trust (GBTC), the leading investment product that custodies Bitcoin (BTC) in the US, currently holding almost $17.4 billion worth of BTC in the trust. The lawsuit, filed in June 2022, was meant to negate the SEC’s rejection of Grayscale’s application to convert its trust into a spot Bitcoin ETF. This does not guarantee approval of GBTCs conversion, nor the approval of any other spot BTC fund, but it does require the SEC to find new grounds to reject such filings – which may prove increasingly difficult.

As MRP correctly noted last week, a decision in the case was expected imminently. The vast majority of cases argued before the DC Circuit Court of Appeals tend to reach a decision within 160 days of oral arguments and Grayscale’s case had exceeded that threshold on August 15. The Grayscale case is made even more significant by having dealt the SEC back-to-back defeats in court against cryptocurrency litigants, following Ripple Labs’s partial victory in a July 18 decision handed down by Southern District of New York Judge Annalisa Torres.

Some key institutional names holding sizeable positions in GBTC, as reported in Fintel data at the end of Q2 2023, include ARK Investment Management, Morgan Stanley, Rothschild Investment Corp, and Horizon Kinetics Asset Management. Despite its success, GBTC’s structure as a trust has often proven to be a suboptimal way to gain exposure to BTC as. Unlike most ETFs, GBTC is a closed-end fund and the number of shares it has issued can’t be increased or decreased quickly in response to market demand. That often results in the trust…