Grayscale’s Major Victory Against the SEC Pushes Bitcoin Higher

On August 29, 2023, the United States Court of Appeals for the District of Columbia Circuit nullified an order from the Securities and Exchange Commission (SEC), giving Grayscale Investments LLC a significant boost in its lawsuit over the conversion of its Bitcoin Trust to a spot bitcoin exchange-traded fund (ETF). Judge Neomi Rao labelled the SEC’s denial “arbitrary and capricious” with the commission failing to explain its different treatment of similar products.

Despite approving the first bitcoin futures-backed ETFs in October 2021, the SEC continues to take a stand against spot bitcoin funds, arguing that they are more exposed to market manipulation than those backed by derivative contracts. Grayscale’s request in June last year to turn its Bitcoin Trust – which launched in 2013 and currently oversees more than $15bn in bitcoin – into a spot bitcoin ETF was subsequently denied by the SEC. As a reminder, the Grayscale Bitcoin Trust is a close-end fund which gives access to Bitcoin spot but at a cost of significant premium/discount. Switching to an ETF wrapper would therefore not only help to bring the trading price closer to the spot price but also decrease the management fees and improve the accessibility as well as the liquidity for current and future investors.

Grayscale has argued against this rejection, claiming that the SEC has breached the Securities Exchange Act through its "unfair discrimination" against issuers of spot Bitcoin ETFs.

Grayscale's latest victory may have significant ramifications for subsequent Bitcoin ETF applications and indeed the broader cryptocurrency and asset management industries. The court’s ruling will potentially determine the future of several spot Bitcoin ETF applications submitted earlier this year and could well prove beneficial for the longer-term growth of the crypto asset. According to the Trackinsight database, we count respectively 20 and 24 ETPs exposed to Bitcoin in Europe and the US, each region representing an equivalent amount of $2,2bn of assets under management. See all bitcoin ETPs here.

A spot Bitcoin ETF enables investors to engage with the digital asset without needing to buy through an exchange or hold it separately in a crypto wallet. Bitcoin jumped from $26,000 to $28,000 on the news before retracting to around $27,000.

The SEC has been given a 45-day period to decide whether it will adhere to the court's ruling, request a full federal appeals court review, or appeal directly to the Supreme Court.