The Securities and Exchange Commission acted arbitrarily and capriciously when it denied Grayscale Investment LLC’s proposed listing of a bitcoin exchange-traded fund (ETP) in July 2022, ruled a unanimous three-judge panel of the United States Court of Appeals for the District of Columbia Circuit on August 29, 2023. Grayscale’s ETP was intended to be traded on NYSE Arca, a national securities exchange.
As a result, the Court granted Grayscale’s petition to vacate the SEC's order, rejecting NYSE Arca’s proposed rule changes to accommodate the Grayscale bitcoin ETP. Effectively, the SEC now must reconsider its previous disapproval of Grayscale’s bitcoin fund.
The Court noted that, prior to consideration of Grayscale’s bitcoin ETP, the SEC approved two exchange-traded funds based on bitcoin futures. To the Court, all three of these funds are materially similar because they closely track the spot market price of Bitcoin. Grayscale put forth uncontested evidence that the prices of the approved futures ETPs are “99.9 percent correlated with spot [bitcoin] market prices.”
Grayscale’s fund proposes to track the spot bitcoin market directly by holding bitcoins, while the two approved funds do so indirectly, by holding futures on bitcoin.
Additionally, the listing exchanges for both Grayscale’s bitcoin fund and the approved bitcoin futures ETPs have identical surveillance sharing agreements with the Chicago Mercantile Exchange – the largest Commodity Futures Trading Commission-overseen futures exchange and where bitcoin futures are traded – to help prevent fraudulent and manipulative behavior. Accordingly, the Court ruled that NYSE Arca “presented substantial evidence that Grayscale is similar, across the relevant regulatory factors, to bitcoin futures ETPs.”
The Court found that the SEC failed to provide a “reasonable and coherent explanation” why such similar products received different treatments. Because “[i]t is a fundamental principle of administrative law that agencies must treat like cases alike,” the Court determined that the SEC’s failure to provide such an explanation rendered the “unlike treatment of like products …unlawful.”
Grayscale currently offers to accredited and certain other qualified investors shares in a bitcoin fund that is not listed on a national securities exchange; with shares regarded as restricted securities; and that are not subject to continuous share redemption and creation. As a result, noted the Court, Grayscale’s shares typically trade at a substantial discount to the price of bitcoin to the detriment of its investors.
By 4 p.m. ET on August 29, 2023, the price of bitcoin increased 6.75% from the prior day to $27,865, generally believed to be in response to the DC Circuit Court’s decision in favor of Grayscale.
The DC Circuit’s Court’s opinion was written by the Hon. Neomi Jehangir Rao.
Click here to access the DC Circuit Court’s decision.