First bitcoin ETF must be reconsidered by SEC, court rules

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Grayscale Investments could soon convert its Bitcoin Trust product into an exchange-traded fund after a federal appeals court ordered the Securities and Exchange Commission to vacate its rejection of the product Tuesday.

D.C. Circuit Court of Appeals Judge Neomi Rao wrote in an opinion that the SEC’s decision to approve two bitcoin futures funds, but to deny applications for a bitcoin spot ETF, was “arbitrary and capricious” and in violation of federal administrative law.

“It is a fundamental principal of administrative law that agencies must treat like cases alike,” Rao wrote in her opinion, adding that the court agreed with Grayscale that “its proposed bitcoin exchange-traded product is materially similar to the bitcoin futures exchange-traded products and should have been approved to trade on NYSE Arca.”

The decision comes as a number of institutions, including BlackRock
BLK,
+1.77%,
VanEck WisdomTree and Fidelity have all applied to sponsor spot bitcoin ETFs.

The SEC had denied Grayscale’s application on the basis that bitcoin spot markets could not be sufficiently surveilled to prevent fraud and manipulation, while bitcoin futures markets were overseen by registered futures exchanges with sophisticated surveillance capabilities.

Grayscale argued that because bitcoin futures prices closely tracked bitcoin spot markets that it was illegitimate to distinguish between the two.

“This is a monumental step forward for American investors, the Bitcoin ecosystem, and all those who have been advocating for Bitcoin exposure through the added protections of the ETF wrapper,” Grayscale spokeswoman Jennifer Rosenthal told MarketWatch.

“The Grayscale team and our legal advisors are actively reviewing the details outlined in the Court’s opinion and will be pursuing next steps with the SEC,” she added. “We will share more information as soon as practicable.”

The SEC is “reviewing a the court’s decision to determine next steps,” according to an agency spokesperson.

The order doesn’t require the SEC to immediately approve Grayscale’s application, but to review the application again, and it’s possible the SEC could find another rationale for rejecting it.

Grayscale’s Bitcoin Trust
GBTC
trades at a discount to bitcoin spot prices, though analysts expect to shrink significantly if it is transformed into an exchange-traded product. GBTC shares jumped 16% following the decision, compared to a 5% gain in bitcoin
BTCUSD,
+0.38%
prices early Tuesday.

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