In a decision that resonated throughout the cryptocurrency and financial industries, the Washington DC Court of Appeals issued a unanimous decision against the US Securities and Exchange Commission (SEC).
It is eagerly awaited to see what steps the SEC will take after the court decision.
The case at issue concerned whether Grayscale violated the requirements of the Administrative Procedures Act (APA) by rejecting its application for a spot Bitcoin exchange-traded fund (ETF), even though the SEC had approved applications for a Bitcoin ETF based on CME futures.
The unanimous decision by a panel of three judges from different political backgrounds concluded that the SEC had indeed violated the APA by arbitrarily and capriciously rejecting Grayscale's application.
The court also ordered the SEC to reverse its decision and reconsider it in accordance with the requirements of the APA.
It is important to note that the court did not rule on:
The basis of Grayscale's application.
Validity of the SEC's concerns regarding fraud and manipulation.
The necessity of custody sharing agreements.
SEC's previous decisions regarding spot BTC ETF applications.
Instead, the court found the SEC's failure to differentiate its rationale for preferring futures-based ETFs to similar spot products to be a violation of the APA.
“The Commission failed to adequately explain why it approved the listing of two Bitcoin futures ETPs but not Grayscale's proposed Bitcoin ETP,” the decision said.
“In the absence of a consistent explanation, this differential regulatory treatment of similar products is unlawful.”
What Awaits the SEC?
The SEC now faces several options:
Appealing the decision: The SEC could seek an “en banc” review involving all of the Court’s 17 justices, but given the unanimous 3-0 decision, the chances of success are slim.
Reconsidering the application: The SEC may reverse its previous decision rejecting Grayscale's application and conduct a new review pursuant to the Court's order.
Defense by evidence: If the SEC can present evidence supporting its distinction between spot and futures markets based on regulatory factors, its position may be better justified.
Canceling futures-backed ETF approvals: An extreme option that is unlikely due to limited market impact.
In the broader context, the Court's decision puts the SEC in a challenging position, increasing the likelihood of a spot Bitcoin ETF being approved.
Major players in the financial industry, including industry heavyweight BlackRock, are seeking a spot BTC ETF, which will impact the SEC's willingness and regulatory approach to approve such products.
*This is not investment advice.