Grayscale's appeal against the US Securities and Exchange Commission's (SEC) refusal to approve the Grayscale Bitcoin spot ETF finally progressed to the US appeals court this week. Greyscale alleges that the SEC violated the Administrative Procedure Act by arbitrarily refusing permission to allow Grayscale's flagship spot bitcoin fund (GBTC) to trade on exchange.
The SEC rejected Grayscale's application in part due to market manipulation concerns relating to the fragmented market for spot Bitcoin trading. Bitcoin futures on the otherhand trade on the Chicago Mercantile Exchange (CME), which is a regulated derivative exchanges. Grayscale has sought to address those concerns in an attempt to seek approval for the first US traded spot Bitcoin ETF.
The SEC’s attempt to differentiate spot Bitcoin from Bitcoin futures markets attracted significant skepticism from the Court, with Judge Rao stating:
[The SEC] really needs to explain…how it understands the relationship between bitcoin futures and the spot price of bitcoin….one is just essentially a derivative. They move together 99.9% of the time. So where’s the gap, in the Commission’s view?
The Court peppered the SEC's legal teams with further questions regarding their justification for rejecting Grayscale’s spot Bitcoin ETF.
The Court's close questioning of the SEC excited market hopes that the Court will overturn its decision. This has seen a positive shift in sentiment for Grayscale, driving the GBTC price up by 5% on Tuesday. GBTC is currently only available to accredited investors and has been trading at a steep discount to its net asset value due in part to fading optimism over the prospect of ETF approval by the SEC.
A ruling on the appeal is expected in 3 to 12 months. Even if Grayscale is successful in overturning the SEC's decision, it remains to be seen whether the SEC will admit defeat or seek to block the ETF on other grounds. A number of other securities regulators have approved spot Bitcoin ETFs for trading, however, the performance of these funds has tracked the collapse in the Bitcoin price over the past 18 months. In Australia a spot ETF for Bitcoin has not been approved.