On Tuesday, a three-judge panel for the U.S. Court of Appeals for the D.C. Circuit raised doubts over a decision by the U.S. Securities and Exchange Commission to deny a Bitcoin spot exchange-traded fund, or ETF.
Shortly after the hearing, which turned on a complaint by the crypto company Grayscale, shares of the companys GBTC shareswhich are backed by Bitcoinsurged more than 10% on a day when the broader market is down. By mid-day ET, GBTC shares fell slightly from their earlier high, trading around $12.50.
Grayscale, represented by former solictor general Donald Verrilli Jr., argued that the SEC had been arbitrary and capricious in approving an ETF based on the futures market for Bitcoin, but then denying Grayscales ETF based on the spot market.
The SEC, represented by senior counsel Emily Parise, countered that the futures market was regulated by the U.S. Commodity Futures Trading Commission through a surveillance agreement with the Chicago Mercantile Exchange, while spot markets remain unregulated and are subject to fraud and manipulation.
The three judges for the courtJudge Sri Srinivasan, Judge Harry T. Edwards, and Judge Neomi Rao expressed skepticism toward the SEC position, seeming to side with Grayscales argument that the futures market relied on the spot market for its underlying pricing, and therefore and fraud and manipulation would affect both. Even as Grayscale provided data that showed the two markets were 99.9% correlated, Parese said that it was not empirically sufficient.
It seems theres quite a bit of information on how these markets work together, Rao asked Parese. The SEC has not offered any explanation that the petitioners are wrong.
James Angel, a faculty member at Georgetowns Psaros Center to Financial Markets and Policy specializing in market structure and financial regulation, told Fortune the judges seemed to understand Grayscales economic argument that the SEC accepted one product and arbitrarily rejected another.
Even so, the case will likely come down to the doctrine of Chevron deference, which entails courts giving agencies like the SEC latitude to interpret statutes related to their expertise. Even though the Supreme Court has recently reduced the amount of administrative deference, agencies such as the SEC generally have a wide remit to interpret statutein this case, the Securities Exchange Act of 1934.
Even as the judges appeared unconvinced of the SECs arguments, Angel said that the outcome is still uncertain. My crystal ball is cloudy, he told Fortune.
There is also a question of what would happen if the judges side with Grayscale. Rao asked Parise if the SEC would go back on its approval of the Bitcoin futures ETF. Parese said she could not speak for the commission, but that it would have to think about the issue anew.
Grayscale, a subsidiary company of the crypto empire Digital Currency Group, currently operates the Grayscale Bitcoin Trust, a fund holding nearly $15 billion in assets. When it launched in 2013, it represented one of the first financial instruments for investors to get access to Bitcoin without buying it directly.
Although investors can buy shares of the trust, they cannot redeem them back into Bitcoina limitation that has caused the fund to trade at a significant discount to the price of its underlying Bitcoin. Verrilli argued that converting the trust to a spot-based ETF would unlock $4 billion in value.
Even with an uncertain outcome, the surge in GBTCs share price indicated investors are optimistic that judges would side with Grayscale.
Given the recent torrent of enforcement actions by the SEC, a Grayscale win would set back Chair Gary Genslers crackdown against the crypto industry, although as Parise alluded, it could also cause the agency to revisit its approval of a Bitcoin futures ETF. The approval of a Bitcoin spot ETF would open the market to new investors, likely causing the price of Bitcoin to rise.
A decision is expected by the end of summer 2023.
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