Court 30 ruling in favor of Grayscale, angrily criticizing the SEC. What does this mean? How far away are we from a Bitcoin spot ETF?

Wu’s Statement | Colin Wu

Wu has learned that on August 29th, the court ruled to approve Grayscale’s review request and revoke the SEC’s order. The specific content is as follows: The federal court ruled that the U.S. Securities and Exchange Commission (SEC) must review Grayscale Investments’ decision to convert the Grayscale Bitcoin Trust (GBTC) into an ETF.

The background of the event is as follows: In October 2021, Grayscale Investments first applied to convert its GBTC closed-end fund into an exchange-traded fund, namely a spot ETF. The SEC rejected the application and stated in the decision that the application failed to address the SEC’s requirements regarding preventing market manipulation and other issues. Grayscale requested the U.S. Court of Appeals for the District of Columbia Circuit to review the SEC’s order.

The CEO of Grayscale stated that the DC Circuit Court made a favorable ruling challenging the SEC’s decision to reject the conversion of GBTC into an ETF. Our legal team is actively reviewing the court’s opinion.

Circuit Judge RAO launched a ruthless attack on the SEC in the court’s opinion, which shocked the outside world. The core of the opinion is that the SEC’s review standards for futures ETFs are consistent with spot ETFs, so there is no reason to reject Grayscale’s request.

The court’s opinion states that the SEC’s rejection of Grayscale’s proposal is arbitrary and capricious because the SEC failed to explain its differential treatment of similar products. Therefore, we approve Grayscale’s petition and revoke the order.

The judge’s comments point out that among thousands of public comments, almost all of them support the conversion of GBTC into an ETF, yet the SEC still refused. If we find that Grayscale is similar to Bitcoin futures ETP in terms of relevant regulatory factors, we must determine whether the SEC has provided sufficient explanation. Grayscale has provided undeniable evidence showing 99.9% correlation between the Bitcoin spot market and CME futures contract prices.

The judge’s comments point out that Grayscale has demonstrated that, in terms of relevant regulatory factors, its proposed Bitcoin ETF is essentially the same as the approved Bitcoin futures ETF. First, the underlying asset Bitcoin is closely related to Bitcoin futures. Second, the shared monitoring agreement with CME is the same and should have the same possibility to detect fraud or manipulation in the Bitcoin and Bitcoin futures markets. The Commission failed to explain why the shared monitoring agreement with CME is sufficient to protect Bitcoin futures ETF from potential fraud but cannot prevent Grayscale’s spot ETF from fraud.

The judge’s comments point out that the SEC neither objected to Grayscale’s evidence of 99.9% correlation between the Bitcoin spot market and the futures market nor implied that market inefficiency or other factors would undermine the correlation. The Commission accused Grayscale of failing to provide other types of evidence; such an explanation, inconsistent treatment of similar products, is arbitrary and capricious. The SEC failed to fully explain why it approved the listing of two Bitcoin futures ETPs but did not approve Grayscale’s proposed Bitcoin ETP. In the absence of a coherent explanation, this differential regulatory treatment of similar products is illegal.

What will the SEC do next?

James Seyffart, an analyst at Bloomberg ETF, pointed out that this does not mean that GBTC will automatically convert to a spot ETF, but it does bring things one step closer. There is no content here that tells us when the SEC must issue another order. So I am not sure about the timetable. My initial thought was a deadline of 45 days or 60 days. As for the appeal, the SEC has 45 days to request a full hearing. A full panel basically means that the case is heard by all the judges in the court (17 in this case), rather than just the three-judge panel that heard the initial decision.

Justin Slaughter, Director of Policy at LianGuairadigm, pointed out that in the 3-0 ruling in favor of Grayscale, two judges appointed by President Obama and President Carter were very critical of the SEC’s arguments. They not only ruled against the SEC, but also agreed with the opinion of Judge Rao, a conservative judge appointed by President Trump. This means that Democratic judges are also disgusted with the SEC’s decision. “What will happen when the SEC loses in front of Democratic judges in multiple circuit courts? What happens when these arguments reach the hostile and conservative Supreme Court?” (Background: Currently, the Republican party relatively supports cryptocurrencies, while the Democratic government opposes them)

The market has also reacted subsequently.

According to Lookonchain monitoring, a whale (0×82…c0ab) exchanged about 17.14 million USDC for 10,000 ETH in Uniswap V3 between 22:27-44 tonight, which was one of the drivers of the rise in ETH prices.

According to @BTC__options, influenced by Grayscale’s victory, cryptocurrency prices have risen across the board, and short-term option IV has started to rise rapidly. BTC cycle option IV once rose to 50%, but has now fallen back. After the rise began, a large number of bullish option transactions were made, especially in ETH, where the volume of bullish transactions was significantly higher than that of BTC. However, at the same time, BTC saw a significant number of liquidations and even a large proportion of bearish option transactions. This shows that the trading behavior of large BTC holders leads the market and often causes volatility when there are anomalies in BTC transactions. In recent months, BTC indicators have been more effective, while ETH has clearly lagged behind BTC.

Full text of the court document:

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