By Sabrina Willmer, Allyson Versprille and Yueqi Yang | Bloomberg
Grayscale Investments is making significant progress towards launching a Bitcoin exchange-traded fund (ETF) in the United States. This potential development could be a groundbreaking moment for the cryptocurrency industry, as it aims to attract billions of dollars from everyday investors.
A three-judge appeals panel in Washington overturned the US Securities and Exchange Commission’s (SEC) decision to block the ETF, which would be tied to the spot Bitcoin price.
This ruling is a major legal victory for the crypto industry, leading to a surge in the price of Bitcoin, up by as much as 7%. The Grayscale Bitcoin Trust also experienced a significant rally, rising by as much as 21%.
The SEC, however, stated that it is reviewing the decision and still has the potential to contest it.
Grayscale has indicated that converting to an ETF would allow it to unlock approximately $5.7 billion in value from the $16.2 billion trust. This conversion would make it easier to create and redeem shares. The launch of an ETF based on the cryptocurrency itself, rather than futures, has long been seen as a significant milestone for the crypto industry.
In June 2022, the SEC rejected Grayscale’s conversion proposal, arguing that a Bitcoin-based ETF lacked adequate oversight to detect fraud. Grayscale subsequently filed a lawsuit to overturn the decision, accusing the SEC of discriminatory practices by approving similar Bitcoin futures ETFs.
‘Arbitrary and capricious’
Judge Neomi Rao wrote, “The denial of Grayscale’s proposal was arbitrary and capricious because the commission failed to explain its different treatment of similar products.”
Grayscale released a statement expressing that the decision is “a monumental step forward for American investors.”
“There is currently a great deal of optimism in the market,” said Owen Lau, an analyst at Oppenheimer & Co, during a phone interview.
The court’s opinion stated that Grayscale provided substantial evidence that its product is similar to SEC-approved Bitcoin futures ETFs. The underlying assets in both types of products are closely correlated, and the surveillance sharing agreements with the Chicago Mercantile Exchange are “identical.”
First ETF
Grayscale pursued the creation of an ETF because the trust’s closed-end structure does not allow for the redemption of shares when prices fall. This causes the trust to trade at significant discounts compared to its underlying Bitcoin. As an ETF, Grayscale would have the ability to create and redeem shares, thereby keeping up with changing demand.
During a hearing on the case in March, the judges questioned the SEC about its decision and seemed to favor Grayscale’s argument that both spot Bitcoin and Bitcoin futures markets carry the same risks of fraud and manipulation.
The case is Grayscale v. SEC, 22-1142, US Court of Appeals for the District of Columbia Circuit.
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