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Author | jk

Last night, the U.S. Court of Appeals for the Federal Circuit asked the U.S. Securities and Exchange Commission (SEC) to review its decision to deny Grayscale Investments’ conversion of its Bitcoin Trust (GBTC) into an exchange-traded fund (ETF). This decision is regarded by the industry as a sign that an ETF may be opened, indicating that the United States may have the first Bitcoin spot ETF in the future.

Timeline sorting:

1. In 2021, Grayscale applied to convert its GBTC trust into an ETF;

2. The SEC subsequently rejected Grayscale’s application based on its “failure to prevent market manipulation” and other reasons;

3. Grayscale subsequently appealed to the Court of Appeal, claiming that the SEC’s actions may have violated the U.S. Administrative Procedure Act because the SEC had approved Bitcoin futures ETFs before making this decision, and the futures ETFs were not related to Grayscale’s products. There is no essential difference in risk;

4. On August 29, 2023, the court ruled in favor of Grayscale and required the SEC to re-examine Grayscale’s application.

Odaily needs to be reminded that Grayscale’s reason for suing is “Since the SEC has approved other Bitcoin futures ETFs, and Grayscale spot ETFs have the same risks and possibility of market manipulation as futures ETFs, the SEC cannot use this reason. Deny my application. This is an assertion about procedural justice, not outcome justice.

Therefore, after the judge ruled in favor of the case, he only asked the SEC to re-examine. This ruling does not require the SEC to directly approve Grayscale’s application. Therefore, legally speaking, the SEC can still reject Grayscale’s application on a different ground for spot ETFs, if the SEC is really determined.

Background and controversy

The case began in October 2021, when Grayscale Investments first applied to convert its closed-end fund GBTC into an ETF. However, the SEC rejected the application on the grounds that it failed to address the SECs concerns about preventing market manipulation, among other things. In particular, the SEC has approved several ETFs related to Bitcoin futures, but has reservations about spot Bitcoin ETFs, which has triggered widespread doubts and discussions in the industry.

Reports indicate that two ETPs had been approved at that time.

Grayscale was unhappy and filed an appeal less than an hour after the SEC’s rejection. Grayscale asked the U.S. Court of Appeals for the District of Columbia Circuit to reexamine the SEC’s decision, arguing that the SEC’s actions may have violated the U.S. Administrative Procedure Act (APA).

Impact of court decisions

After Grayscale won the lawsuit, it immediately aroused heated discussions in the industry. This may not only open the door for Grayscale itself, but may also pave the way for spot Bitcoin ETF applications from other financial institutions such as BlackRock and Fidelity. That is, if the SEC cannot reject Grayscale’s application based on market manipulation and other reasons, and cannot find other reasons, it will need to approve Grayscale and all other spot Bitcoin ETFs.

Another effect is that analysts have long believed thatSwitching from Closed-End Funds to ETFs May Remove GBTC Discounts Completely, because ETFs allow redemptions and thus typically trade close to their fair value. Grayscales new structure from a trust to an ETF means investors or authorized participants will now be able to deal directly with the fund, rather than just on the secondary market. This usually helps reduce the deviation between the funds price and the funds net value, allowing investors to buy and sell at prices closer to the funds net value. This change is beneficial to investors as it provides a more flexible and efficient trading mechanism. Therefore, this decision may bring a lot of institutional funds into the market, because the current discounted Bitcoin may be a good investment target.

In addition to potentially eliminating the GBTC discount, the change also means the fund will operate in a more formal, regulated environment.The change in the funds structure will see its shares registered with the SEC under the Securities Act of 1933 and upgraded from the OTC market to the NYSE Arca.

Such a change could appeal to a wider group of investors, including those more inclined to invest in products that are more strictly regulated. This may also make the investment vehicle more liquid and accessible.

Next step

Still, its unclear how the SEC will enforce this court order and what its final decision will be. Cinneamhain Ventures partner Adam Cochran said the SEC has three options in response to the court decision: postpone the decision and propose new reasons for rejection; admit and approve (Grayscale ETF); ask the en banc bench to appeal the case (en banc appeal). Key issues around market manipulation, investor protection and regulatory oversight still need to be addressed. For more market opinions, see this articleMultiple Views: Grayscale wins the case, how far away is the Bitcoin spot ETF?

However, there is no denying that this court decision could be an important turning point in cryptocurrency regulation and the availability of crypto investment products in the United States. The incident also raises key questions about how regulators should approach new financial instruments based on emerging technologies. Overall, this development will be closely watched as it may not only impact Grayscale Investments and GBTC, but may also have far-reaching consequences for the entire U.S. cryptocurrency market and related financial products.