Yet Another Court Win for Crypto, but SEC’s Gensler Fights Back 

By Sam Licker and Liza Kirillova

Following a federal court’s ruling that Ripple Labs did not violate federal law by selling its XRP token on public exchanges, the U.S. Security and Exchange Commission took another hit with respect to its aversion to cryptocurrency. In late August, a three-judge panel of the D.C. Court of Appeals ruled that the SEC was wrong to deny Grayscale Investment’s (Grayscale) proposal to convert its Bitcoin Trust (OTC:GBTC) into a spot Bitcoin ETF, which would follow Bitcoin’s underlying market value and provide investors with exposure to the digital currency without actually needing to buy it.  

By way of background, an ETF—or exchange-traded fund—is a “bundle” of securities that investors can buy or sell on a stock exchange. The securities underlying the ETF can be stocks, bonds, commodities, or other assets. While ETFs fluctuate just like the rest of the market, they are poised to allow investors to diversify their portfolios and allow everyday investors access to certain stocks that they may otherwise be priced out of or unable to purchase. Notably, the SEC has denied all spot EFT applications in the past, claiming that applicants have not successfully proven that they can protect investors from market manipulation.   

 The legal battle involving Grayscale commenced when the investment company sued the SEC for allegedly arbitrarily blocking Grayscale’s proposal for conversion. Ultimately, the appellate court determined that the SEC had, in fact, acted too hastily in denying Grayscale’s proposal and ordered that the Commission “reevaluate” its decision. In the opinion filed by Judge Neomi Rao, the three-judge panel held that the “Commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned [sic] decisionmaking.” In other words, the SEC failed to adequately explain why it previously approved the listing of Bitcoin futures ETFs, but not Grayscale’s proposed Bitcoin ETF. For its part, Grayscale’s legal counsel commented that if there was a reason “offered in attempting to differentiate” the two arrangements “[they] are confident that it would have surfaced by now.” The ruling lead to an immediate surge in Bitcoin prices and gave many domestic investors hope that we may yet see a spot Bitcoin ETF in the U.S.  

The impact of the ruling by the Court of Appeals goes far beyond Grayscale and Bitcoin. Indeed, the decision has rippled throughout the entire crypto industry, leading stocks for crypto exchanges, such as Coinbase, and crypto mining companies, like Marathon Digital, to soar. The outcome on appeal has also provided some reassurance to other asset managers seeking to win approval for their products (read: BlackRock’s proposal to create its own spot Bitcoin ETF, which it filed in June).  

 Of note, excitement in the wake of the determination in the Grayscale case may be premature. The ruling does not serve to approve the ETF; instead, it only orders the SEC to reevaluate its denial. As a matter of procedure, the SEC has 45 days from the August 29 ruling to appeal, after which the case will be sent to the entire D.C. appeals court or, potentially,  to the Supreme Court. In the meantime, the SEC has postponed its decisions on six pending applications for spot Bitcoin EFTs.  

The SEC and Chairman Gary Gensler still have an arsenal of options to delay or deny Grayscale’s proposal. If the SEC appeals, the process could take months or years to work its way back through the legal system, and even if the Commission acquiesces to the ruling, it may demand Grayscale to file an entirely new application, which could take up to another year to process. The SEC may also cite concerns over market manipulation that could result from a spot ETF, as the SEC’s position appears to remain that the crypto market as a whole is not a normal functioning market. That being said, a spot ETF could help bring stability to the marketplace, providing consumers with the peace of mind that comes with regulatory oversight, accessibility, investor protection, and institutional adoption for crypto.  

As the story unfolds, we will be keeping an eye on this ruling, the SEC’s response, and future crypto news.  

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.