Federal Appeals Court Overrules SEC, Opening Door for Bitcoin ETF Approval

A spot bitcoin ETF would trail the actual market price of the cryptocurrency, providing investors exposure to bitcoin without requiring them to purchase the digital currency.

A federal appeals court has overturned the U.S. securities regulator’s rejection of Grayscale Investments’ bid to establish a spot bitcoin exchange-traded fund (ETF).

This landmark ruling by a three-judge panel of the District of Columbia Court of Appeals criticized the Securities and Exchange Commission (SEC) for not sufficiently justifying its denial of Grayscale’s ETF proposal, demanding a review of the decision.

The news triggered a more than 6% surge in the price of bitcoin, currently valued at $27,858.

A spot bitcoin ETF would trail the actual market price of the cryptocurrency, providing investors exposure to bitcoin without requiring them to purchase the digital currency.

The SEC has consistently declined all bitcoin ETF applications, including Grayscale’s, citing concerns about safeguarding against market manipulation.

While the court’s decision doesn’t guarantee automatic approval for Grayscale’s ETF, it represents a significant advancement in the decade-long endeavor to introduce a bitcoin ETF product.

Grayscale CEO Michael Sonnenshein hailed the court ruling as a “historic milestone for American investors.”

Grayscale stated that it is evaluating the decision and planning its next steps in collaboration with the SEC.

The SEC has a 45-day window to challenge the ruling. A spokesperson for the agency mentioned that they are assessing the court’s verdict to determine their course of action.

The cryptocurrency industry lauded the decision as a precedent-setting event. Notably, asset management giants such as BlackRock, Fidelity, and Invesco have similar applications awaiting the SEC’s judgment for spot bitcoin ETFs.

Ji Kim, the general counsel and head of global policy at the Crypto Council for Innovation, emphasized that the court’s decision holds significance beyond Grayscale and bitcoin, impacting the broader crypto sector.

In June 2022, the SEC turned down Grayscale’s spot bitcoin ETF application, asserting that it didn’t meet standards for anti-fraud and investor protection.

This rationale was consistently applied to deny numerous other applications, including those from Fidelity and VanEck.

Grayscale challenged the SEC’s decision, arguing that if the agency had previously approved surveillance agreements to counter fraud in bitcoin futures-based ETFs, the same framework should apply to Grayscale’s spot fund, given that both types of funds rely on bitcoin’s price.

The court’s verdict stated that the SEC inadequately explained its divergence from Grayscale’s claim that the bitcoin spot and futures markets maintain a 99.9% correlation.

The ruling criticized the SEC’s handling, asserting it fell short of the standard for reasoned decision-making.

This court judgment represents the second recent legal victory for the crypto industry.

In July, a judge ruled in favor of Ripple Labs in a case brought by the SEC, stating that Ripple hadn’t violated federal laws by selling its XRP token on public exchanges. The SEC intends to appeal this ruling.

In the event of an SEC appeal, the case could reach the U.S. Supreme Court or undergo review by the entire D.C. appeals court.

If the SEC opts not to appeal, the court would issue a mandate outlining the execution of its decision, potentially instructing the SEC to approve or reevaluate Grayscale’s application, opening the possibility of rejection based on different grounds.

The implications of this ruling on BlackRock’s June submissions and those of other firms for spot bitcoin ETFs are yet to be determined, pending the SEC’s pending decisions.

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