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Appeals Court Hears Case Over SEC Rejection of Grayscale Exchange-Traded Fund

Published Date:
Mar 7, 2023

A three-judge panel of the federal appeals court in Washington heard a case Tuesday that could have implications for the crypto industry, Bloomberg and Reuters reported.

Crypto asset manager Grayscale Investments is suing the U.S. Securities and Exchange Commission (SEC) over the agency's rejection of its application to convert its $14 billion Bitcoin Trust into a spot bitcoin exchange-traded fund (ETF). The SEC had rejected the application, saying that cryptocurrency markets are exposed to fraud and manipulation. Grayscale called the decision “arbitrary and capricious,” as well as discriminatory, and asked the D.C. Circuit Court of Appeals to overturn it.

If Grayscale prevails, similar ETFs could be created, expanding the market for everyday investors in digital assets. The SEC, which has cracked down on the industry in the wake of recent exchange collapses such as that of FTX, has claimed that most digital assets are securities and, as such, must be registered with it.

During oral argument, the D.C Circuit panel pointed out that the SEC has previously approved some surveillance agreements to prevent fraud in bitcoin futures-based ETFs, Reuters reported. Why, the judges asked the SEC's counsel, couldn't the  same setup work for Grayscale's spot fund, since both spot and futures funds rely on bitcoin's price?

"It seems like it's fine for an agency to say okay, we need some more information, but it seems there's quite a bit of information here on how these markets work together, and the SEC has not offered any explanation ... that the petitioners here are wrong," said Judge Neomi Rao.

According to Reuters, Grayscale's lead counsel Donald Verrilli Jr., argued that a spot bitcoin ETF would "better protect investors" because it would give them the benefit of oversight on the basis of the surveillance agreements set up with the Chicago Mercantile Exchange, where bitcoin futures trade.

Emily True Parise, senior litigation counsel for the SEC, argued that the agency doesn't have the data to determine whether those surveillance agreements could also pick up potential fraud and manipulation in the spot markets. "The evidence is just mixed at this point. It's bi-directional sometimes," she said, observing that bitcoin futures have been trading only since 2017.

“Allowing an ETF means anybody with a brokerage account — which is basically available to anybody who can fog a mirror in the US—can now speculate on Bitcoin,” James Angel, an associate finance professor at Georgetown University who signed an amicus brief in support of Grayscale, told Bloomberg.

“Grayscale's CEO, Michael Sonnenshein, told Reuters that he expects a final ruling in the case this fall, and that he anticipates the court will rule in Grayscale's favor. He told Reuters in January that Grayscale would appeal the case if the court backed the SEC's decision to reject its bitcoin ETF proposal.

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