Court's Bitcoin ETF Ruling Isn't a Slam Dunk

What You Need to Know

A court has determined that the SEC has been unreasonable when treating a bitcoin ETF differently from a bitcoin futures ETF.
However, the SEC could appeal the ruling, an action it often takes when it doesn’t get what it wants.
Or it could acquiesce and send bitcoin prices surging.

Advisors and investors are celebrating the ruling by the U.S. Court of Appeals for the D.C. Circuit in the case of Grayscale v. SEC.

Grayscale complained that although the SEC has approved bitcoin futures ETFs, it has consistently rejected every spot bitcoin ETF application — a position that nobody outside the SEC believes makes any sense.

Futures contracts are derivatives, after all, so if you are OK with the derivatives, how can you not be OK with the underlying asset? It’s like saying you can eat ketchup but not tomatoes.

At least, that was Grayscale’s argument. And on Aug. 29, the court agreed, saying, “The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products.”

The court noted that the SEC must not permit “unfair discrimination between customers, issuers, brokers or dealers,” and since Grayscale’s bitcoin ETF would be similar to approved bitcoin futures ETFs, the SEC is obligated to explain why a bitcoin ETF is materially different from a bitcoin futures ETF.

The SEC has failed to do this.

In fact, the court noted that Grayscale had provided the SEC with substantial evidence that its proposed bitcoin ETF (which would allow investors to be able to own bitcoin without having to buy, store or secure it themselves) was similar to approved bitcoin futures ETFs. Therefore, the court said, Grayscale’s spot bitcoin ETF application should also have received approval.

Indeed, the court noted that the SEC did not dispute Grayscale’s evidence that the spot market and the futures market for bitcoin are 99.9% correlated.

That’s why the court blasted the SEC, calling its actions “unreasonable.”

Writing for the three-judge panel, Judge Neomi Rao wrote, “Because the spot bitcoin market and the bitcoin futures market are so tightly correlated, a price distortion in the spot market will be reflected in the price of the futures market. After all, futures are derivatives of the spot market. The SEC failed to explain why a bitcoin futures ETF protects investors from potential fraud, but not Grayscale’s proposed bitcoin ETF.”

The court also said the SEC offered no compelling reason why it felt that a measure for assessing the potential for fraud and manipulation was necessary for bitcoin ETFs but unnecessary for bitcoin futures ETFs.

Bottom line, the court said: “The SEC failed to reasonably explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s similar proposed bitcoin ETF.”

Thus, the SEC’s behavior was “arbitrary and capricious.”