On Tuesday, a three-judge panel for the US Court of Appeals for the DC Circuit raised doubts over the decision by the US Securities and Exchange Commission to reject Bitcoin spot exchange-traded funds, or ETFs.
Shortly after the hearing, which turned a complaint by the crypto company Grayscale, Shares of the company GBTC Shares-supported by Bitcoin-surged more than 10% on a day when the market was down. By mid-day ET, GBTC shares were down slightly from their previous high, trading around $12.50.
Grayscale, represented by former solicitor 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 rejected the Grayscale ETF based on the spot market.
The SEC, represented by senior counsel Emily Parise, argued that the futures market is regulated by the US Commodity Futures Trading Commission through an oversight agreement with the Chicago Mercantile Exchange, while the spot market remains unregulated and subject to fraud and manipulation.
The three judges for the court – Judge Sri Srinivasan, Judge Harry T. Edwards, and Judge Neomi Rao – expressed skepticism towards the position of the SEC, apparently sided with Grayscale’s argument that the futures market depends on the spot market for its underlying price, and therefore and fraud and manipulation will affects both. Although Grayscale provides data showing the two markets are 99.9% correlated, Parese says that’s not empirical enough.
“There seems to be enough information about how these markets work together,” Rao Parese asked. “The SEC does not provide information that petitioners are at fault.”
James Angel, a faculty member at Georgetown’s Psaros Center to Financial Markets and Policy specializing in market structure and financial regulation, told fortune The judge seemed to understand Grayscale’s economic question that the SEC accepted one product and arbitrarily rejected another.
Even so, the case may fall under the Chevron doctrine of deference, which requires courts to give agencies like the SEC latitude to interpret statutes related to their expertise. Although the Supreme Court has recently reduced the administrative burden, agencies such as the SEC generally have the authority to interpret statutes—in this case, the Securities Exchange Act of 1934.
Although the justices appeared unconvinced by the SEC’s arguments, Angel said the outcome is still uncertain. “My crystal ball is cloudy,” he said fortune.
There is also the question of what would happen if the judge sided with Grayscale. Rao asked Parise if the SEC would back down on the approval of the Bitcoin futures ETF. Parese said he could not speak for the commission, but that it needed to “rethink the issue.”
Grayscale, a subsidiary of crypto empire Digital Currency Group, currently operates the Grayscale Bitcoin Trust, a fund that holds nearly $15 billion in assets. When it was launched in 2013, it was one of the first financial instruments for investors to access Bitcoin without buying it directly.
Although investors can buy shares from the trust, they cannot redeem them back to Bitcoin-a limitation that has caused the fund to trade at a significant discount to its underlying Bitcoin price. Verrilli contends that turning the trust into a spot-based ETF would unlock $4 billion in value.
Even with the uncertain outcome, the rise in GBTC’s share price shows investors are optimistic that the judge will side with Grayscale.
Given the recent torrent of enforcement actions by the SEC, Grayscale’s win will reset Chairman Gary Gensler’s crackdown on the crypto industry, although as Parise alluded, it could also cause the agency to revisit its Bitcoin futures ETF agreement. The approval of the Bitcoin spot ETF will open up the market to new investors, possibly causing the price of Bitcoin to rise.
A decision is expected by the end of summer 2023.
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