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  • L Misthos and M Bacina

Grayscale wins Bitcoin ETF appeal against SEC

Updated: Sep 1, 2023

The United States Court of Appeals for the District of Columbia Circuit has today granted Grayscale Investments, LLC's petition for review against the Securities and Exchanges Commission (SEC). This case, which deals with the SEC's denial of Grayscale's proposed Bitcoin Exchange-Traded Product (ETP), has important implications for the regulatory landscape of blockchain and Web3 technologies, particularly given the history of Bitcoin ETFs in Australia and the ongoing efforts of businesses to have Bitcoin trading in traditional markets.

Grayscale Investments, a major player in the cryptocurrency market and owner of 3.4% of all mined bitcoin (worth around USD$30 billion), sought approval for its Bitcoin spot ETP to be listed on NYSE Arca, which is part of the NY stock exchange. The SEC denied this application citing various regulatory concerns, particularly regarding security and consumer protection.

However, the Court was critical of those concerns, finding that the SEC had acted in an "arbitrary and capricious" manner by approving similar Bitcoin ETPs which were futures based, while denying Greyscale's application for a spot ETP, and not providing an adequate explanation. This is the second time in as many months that the SEC has been handed a less than favorable judgement.

The Court emphasised that similar cases must be treated similarly as a foundation principle of administrative law and that:

the Commission failed to provide the necessary "reasonable and coherent explanation" for its inconsistent treatment of similar products.

The SEC's decision to reject the ETP, which has been followed was based primarily on the "significant market requirement", which Grayscale allegedly failed to meet. The significant market test is designed to assess the potential impact of a product on the market, and gauge its susceptibility to manipulation. Factors which must be considered under the "significant market requirement" include the market influence of the product, market surveillance and/or market depth and liquidity.

The Court, however, found that the SEC had not provided a "rational explanation" for why the SEC believed Grayscale's ETP was more likely to contravene the significant market requirement than the previously approved Bitcoin futures ETP, and that the SEC's explanation was "arbitrary and capricious".

Australian businesses have been keenly observing the regulatory developments in the United States, but Bitcoin ETPs in Australia have a mixed history with a futures ETF being delisted last year due to lack of investor (noting that the ETF launched on the day Terra/Luna collapsed) and Monochrome recently having a Bitcoin ETF for the ASX move forward in the approval process.

The Grayscale case could serve as a reminder of the importance of regulators to work to properly understand blockchain and crypto-assets, and move away from past narratives of "fraud and scams" which increasingly are shown to be inaccurate. A movement to fit for purpose regulations would help avoid the risk of further litigation of this kind.


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