U.S. securities regulators were wrong to reject Grayscale Investments’ application to create a spot bitcoin exchange-traded fund, a federal appeals court ruled Tuesday, a landmark victory that could pave the way for the first such product.

The U.S. Securities and Exchange Commission (SEC) failed to adequately explain its reasons for rejecting Grayscale’s offering and should review its decision, a three-judge panel of the Washington, D.C., appeals court said.

The price of bitcoin, the world’s largest cryptocurrency, eventually rose by more than 6 percent to $27,858 (roughly Rs 23,04,400) following the news.

A spot bitcoin ETF would track its underlying market price, giving investors exposure to the digital asset without having to buy the currency. The SEC rejected all proposed bitcoin ETFs, including Grayscale’s, saying they did not meet standards to prevent market manipulation.

While the ruling doesn’t mean Grayscale’s ETF is automatically approved, it’s a huge boost to the industry’s decade-long effort to advance a bitcoin ETF product.

Grayscale Chief Executive Michael Sonnenshein said in a statement that the court’s decision was a “historic milestone for U.S. investors.”

A Grayscale spokesperson added that the company was reviewing the details and would seek “follow-up steps in cooperation with the SEC.”

The SEC has 45 days to appeal the ruling. A spokesman for the agency said it was reviewing the court’s ruling to determine next steps.

The cryptocurrency industry was quick to welcome the ruling. Several other asset managers, including BlackRock, Fidelity and Invesco, are also filing similar spot bitcoin ETF applications with the SEC.

“This ruling doesn’t just concern Grayscale or Bitcoin, it sets a precedent for the broader crypto industry,” said Ji Kim, general counsel and head of global policy at the Crypto Innovation Council.

cryptocurrency victory

The SEC rejected Grayscale’s spot bitcoin ETF application in June 2022, arguing that the proposal did not meet anti-fraud and investor protection standards. The company has rejected dozens of other applications for similar products, including those from Fidelity and VanEck, on the same grounds.

Grayscale sued the SEC, arguing that since the agency previously approved certain monitoring protocols to prevent fraud in bitcoin futures-based ETFs, the same setup should also apply to Grayscale’s spot funds, since both spot and futures funds are dependent on the price of bitcoin .

In its ruling, the court said the SEC failed to explain why it disagreed with Grayscale’s claim that the bitcoin spot and futures markets are 99.9 percent correlated.

“The committee’s unexplained discounting of apparent financial and mathematical relationships between spot and futures markets falls short of the standard of sound decision-making,” the court said in an opinion filed by Judge Neomi Rao of the Washington, D.C. Court of Appeals.

The ruling is the second major legal victory for the cryptocurrency industry in recent weeks, after a judge ruled in July that Ripple Labs’ sale of its XRP token on a public exchange did not violate federal law in a case brought by the SEC. The SEC said it plans to appeal the findings.

If the SEC appeals the Grayscale ruling, the case would go to the U.S. Supreme Court or be reviewed by the entire Washington, D.C., appeals court.

If the SEC chooses not to appeal, the court will issue a warrant specifying how its decision will be enforced. This could include directing the SEC to approve the application, or to re-examine Grayscale’s application, in which case the SEC could still reject the proposal on other grounds.

It remains to be seen how the ruling might affect a proposal to offer a spot bitcoin ETF submitted by BlackRock, the world’s largest asset manager, and several others in June. The SEC has yet to make a decision on those filings.

© Thomson Reuters 2023

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