Today the Court of Appeals ruled that the SEC was wrong to block the Grayscale Bitcoin Trust from converting to an exchange traded fund (ETF). That’s because the SEC had already allowed ETFs based on Bitcoin futures and the prices correlate 99.9% of the time.
However, the ruling is not binding for the next seven days which leaves time for the SEC to ask for the case to be reheard. Three Appellate judges made up the deciding panel, but the SEC could request the case be heard before all the judges.
Grayscale’s Bitcoin Trust has been notorious for its discount to market prices, hence the desire to convert to an exchange traded fund (ETF) which will be more liquid as it’s not limited to accredited investors. The trust price reached almost a 50% discount in January and improved to 44% below spot prices in mid-June when BlackRock filed for a Bitcoin ETF. Since then the discount has declined to around 25%.
“It is a fundamental principle of administrative law that agencies must treat like cases alike,” said Circuit Judge Rao. “The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products.”
Futures-based products are traded on the CME, which is a regulated exchange, unlike spot cryptocurrency exchanges. However, the price correlation between the futures and spot markets was seen as undermining that rationale because futures prices are based on spot markets. If the spot markets are being manipulated, then that will impact the futures market as well.
The court concluded that the SEC failed to provide a “reasonable and coherent explanation” for treating similar products inconsistently.
Meanwhile, there is a queue of spot Bitcoin ETFs awaiting approval by the SEC. The key attraction is that ETFs are an accessible surrogate for owning Bitcoin directly without the hassle of custody. Apart from the BlackRock iShares Bitcoin Trust, the SEC is reviewing refiled applications from ARK 21Shares, Bitwise, VanEck, Wisdomtree, Investco Galaxy, Wise Origin and Valkyrie.
The Bitcoin price jumped from just shy of $26,000 to above $27,500.