Knight Checks King: Court of Appeals Rules in Favor of Grayscale

The United States Court of Appeals announced this morning it’s ruling in favor of the Grayscale petition to convert its flagship fund, GBTC, to a bitcoin ETF. In the intricate game of chess the SEC plays with bitcoin funds, it’s a “check” for Grayscale’s white knight strategy.

The ruling hinged on the SEC’s lack of clarity on why it treated bitcoin futures ETFs materially differently than spot bitcoin ETFs. The SEC approved the former while summarily denying all attempts at the latter.

“Grayscale’s win is a huge victory for all potential spot bitcoin ETFs — not just for Grayscale,” said Roxanna Islam, CFA, CAIA, associate director of research, head of sector and industry research at VettaFi. “While we will still have to wait and see how the SEC handles its execution, it is likely that they will have to approve Grayscale’s spot ETF along with other pending spot bitcoin ETF filings.”

Setting the Board, Moving the Pieces

The ruling is the culmination of a process that began back in October 2021. Grayscale filed to convert its flagship fund, the Grayscale Bitcoin Trust (OTCQX: GBTC) into a spot bitcoin ETF. The filing came in the wake of the approval of bitcoin futures ETFs such as the ProShares Bitcoin Strategy ETF (BITO).

The premise was simple, according to Grayscale. If the SEC was comfortable with a bitcoin futures product that tracks the underlying bitcoin spot prices, they should be equally comfortable with a direct investment product. It turns out that wasn’t the case.

The following June, the SEC denied Grayscale’s application. In response, Grayscale sued, calling the ruling “arbitrary and capricious” in a letter to investors.

The denial hinges on the SEC’s insistence that the burden of proof that the underlying markets are free of “fraudulent and manipulative acts” falls on the exchanges. In lieu of proof of this, the SEC’s alternative is for exchanges to submit to being surveilled.