Grayscale Wins Lawsuit Against SEC Over Spot Bitcoin ETF Paving Way for Institutional Investors

D.C. Circuit overturns SEC’s denial, paving way for first spot bitcoin ETF

TL;DR: In a landmark legal victory, Grayscale’s Bitcoin Trust succeeded in its lawsuit against the SEC, clearing the way for approval of the first spot bitcoin exchange-traded fund (ETF) in the U.S. The D.C. Circuit ruled the SEC failed to justify denying Grayscale while approving similar bitcoin futures ETFs.

In a long-awaited triumph for the crypto industry, the U.S. Court of Appeals for the D.C. Circuit overturned the Securities and Exchange Commission’s (SEC) denial of Grayscale‘s application to convert its Bitcoin Trust (GBTC) into an ETF.

As the world’s largest digital asset manager with over $30 billion in assets, Grayscale filed suit in June 2022 challenging the SEC’s decision to greenlight bitcoin futures ETFs yet reject GBTC’s bid to become a spot bitcoin ETF. Spot ETFs hold an asset directly, while futures ETFs hold derivatives contracts.

In the unanimous ruling, the three-judge panel found the SEC “failed to adequately explain” the contradictory treatment of essentially identical products. The opinion stated, “this unlike regulatory treatment of like products is unlawful,” granting Grayscale’s petition.

“This is a historic milestone for American investors and the Bitcoin ecosystem,” said Grayscale CEO Michael Sonnenshein, lauding the added protections of an ETF wrapper. Grayscale General Counsel Craig Salm called the outcome “incredibly exciting,” noting they will work closely with the SEC on next steps.

The SEC justified its differential treatment by applying a “significant market” test, claiming insufficient protections against manipulation in spot bitcoin markets. But the court found the SEC did not reasonably distinguish the approved futures ETFs, which exhibit a 99.9% price correlation with spot bitcoin.

While the SEC may appeal or present new rationales for denying GBTC, market observers remain optimistic this precedent will enable the first spot bitcoin ETF after nearly a decade of rejections. “This ruling paves the way for investors to finally gain access to bitcoin in their brokerage accounts,” said NYSE’s amicus brief supporting Grayscale.

Today’s court victory caps years of setbacks suffered by Grayscale and other issuers seeking SEC authorization of spot bitcoin ETFs. Investors widely anticipate that low-cost, liquid spot ETFs would spur billions in inflows, helping realize crypto’s mainstream investment potential.