Grayscale’s Bitcoin ETF triumphs over SEC, fueling crypto market rally

Grayscale secured a pivotal victory against the SEC, paving the way for the U.S.’s first Bitcoin spot ETF and igniting a surge in Bitcoin and other cryptocurrency prices.

In a milestone development, Grayscale Investments LLC secured judicial backing for the initiation of a Bitcoin spot exchange-traded fund (ETF) in the United States. A panel of three federal judges in Washington effectively annulled the U.S. Securities and Exchange Commission’s prior decision to prevent the ETF from going forward. This decision has acted as a catalyst, triggering Bitcoin’s price to ascend significantly in its immediate aftermath.

The U.S. Court of Appeals for the District of Columbia Circuit sided with Grayscale, stating that the SEC’s earlier denial of the company’s Bitcoin spot ETF proposal was both “arbitrary and capricious.” The SEC had initially rejected the application in June 2022 on the grounds of insufficient oversight and risk of fraud associated with trading Bitcoin (BTC) on unregulated markets. 

However, the court expressed that Grayscale had presented “substantial evidence” to indicate that their offering closely resembled existing Bitcoin futures ETFs, which have already received SEC approval. Judge Neomi Rao emphasized the similarities, including the “identical” surveillance-sharing agreements both products have with the Chicago Mercantile Exchange.

Bitcoin and other cryptocurrencies rally after Grayscale’s win

Post-ruling, Bitcoin, which had largely been stagnant through the summer, experienced a significant uptick in value, registering a 5% increase within an hour, moving from a trading range of just above $26,000 to approximately $27,921, according to data from CoinGecko. This development also positively influenced the market behavior of other leading cryptocurrencies. The entire market is up by 4% in the last 24 hours, with other major tokens like Dogecoin (DOGE), Polygon (MATIC), and Litecoin (LTC) up by nearly 6%. 

The ETF’s potential in transforming investments

For Grayscale, the success in court is more than just a legal win; it also holds substantial economic implications. The firm has been battling to convert its Bitcoin Trust into a spot ETF as the trust’s existing closed-end structure doesn’t permit investors to redeem shares during market downturns. Consequently, this has resulted in the trust trading at substantial discounts compared to its underlying Bitcoin asset. By successfully converting to an ETF, Grayscale anticipates unlocking nearly $5.7 billion in value from its $16.2 billion trust by streamlining the process of share creation and redemption to better align with market demand.

During the March court hearing, the federal judges questioned the SEC’s inconsistent stance. The regulators had to justify why they regarded the spot market for Bitcoin and the futures market differently in terms of fraud and manipulation risk, especially given that the pricing and market behavior of the two are closely correlated.

The court ruled in Grayscale’s favor primarily because it had demonstrated sufficient data indicating that fraudulent activities in the spot Bitcoin market would have evident repercussions in the regulated futures market as well.

As it stands, the court’s ruling has offered the United States a potential pathway to its first Bitcoin spot ETF—a development eagerly awaited by investors. Although it doesn’t mean that GBTC is automatically converting into an ETF, it’s a significant first step. The SEC now finds itself compelled to revisit its regulatory approach toward cryptocurrencies, a sector that continues to challenge traditional financial frameworks.