On August 29, 2023, the U.S. Court of Appeals issued a ruling on Grayscale Investment LLC (Grayscale) and the Securities and Exchange Commission (SEC) in the proceedings that began on March 7, 2023. This decision was covered in the world press with the main idea of “Grayscale won the case, green light for Bitcoin ETF”. Grayscale and its executives also posted the same content on their social media accounts. However, either no one (journalists and even bitcoiners) consciously asked what the ruling actually said, or there was a serious lack of awareness.
WHAT HAPPENED?
At the beginning of the article, it is necessary to share the explanations of some of the abbreviations, as there is a wide variety of capital instruments in the US Capital Market, so that the subject can be understood more clearly while reading the article;
ETP : Tradable financial instruments that closely track an underlying market, such as indices, currencies and shares. Exchange-traded products.
ETF : Funds that are traded on exchanges and usually track a specific index. Exchange-traded funds. Essentially a type of ETP.
After the SEC rejected Grayscale Investment’s application for a spot bitcoin exchange-traded fund, it was questioned whether the SEC was justified in its decision, as the agency had previously approved bitcoin futures products.
Grayscale Investment LLC’s application to convert the spot Grayscale Bitcoin Trust (GBTC) (GBTC.PK) into an exchange-traded fund (ETF) was rejected on the grounds that the proposal did not meet anti-fraud and investor protection standards.
The court ordered the SEC to defend Grayscale’s argument that because the regulator had previously approved certain oversight agreements to prevent fraud in ETFs based on bitcoin futures, the same setup should be satisfactory for Grayscale’s spot fund because both spot and futures funds are based on the price of bitcoin.
Bitcoin futures ETFs track bitcoin futures contracts, or agreements to buy or sell bitcoin at a specific price on a specific date. A spot bitcoin ETF, on the other hand, tracks the underlying market price of bitcoin. Therefore, a spot bitcoin ETF would give investors access to bitcoin without buying bitcoin directly.
WHAT IS THE SUBJECT OF THE VERDICT?
The subject matter of the verdict, again as clearly stated in the text of the verdict (page 3, paragraph A-1) (1)
“This case involves two kinds of exchange-traded products (“ETPs”)—those holding bitcoins and those holding bitcoin futures. Grayscale’s primary claim is that the Commission failed to treat like cases alike by denying the listing of Grayscale’s proposed bitcoin ETP and approving two bitcoin futures ETPs.”
In simpler terms, the subject matter of the case/decision is the claim that the SEC’s refusal to approve another capital market instrument of the same nature when there are multiple capital market instruments that have already been approved by the SEC is unlawful.
The decision states that in the last few years, the SEC has received numerous applications to list bitcoin investment products on national exchanges and that the SEC has rejected every application to list a bitcoin ETP, and continues
“…however, were recently approved by the Commission. In April 2022, the Commission approved NYSE Arca’s proposal to list the Teucrium Bitcoin Futures Fund…”
it is stated. In fact, the entire decision is based on precisely this determination. Grayscale’s basic premise is that it was arbitrary for the SEC to reject the listing of Grayscale’s proposed bitcoin ETP and approve the listing of other materially similar bitcoin futures ETPs.
WHAT ARE THE ISSUES THAT THE COURT CONSIDERS?
Only and only these are what the court considered
“…whether Grayscale demonstrated its investment product was similar across the relevant regulatory factors to the Teucrium and Valkyrie ETPs that were approved by the Commission.”
“…If we find that Grayscale is similar to the bitcoin futures ETPs across the relevant regulatory factors, we must determine whether the Commission provided an adequate explanation for approving the two bitcoin futures ETPs but denying Grayscale’s bitcoin ETP….”
No other issues were considered by the tribunal.
CONCLUSION :
The Court naturally found that there was no legal basis for the SEC’s prior approval of similar ETPs, but not Grayscale, and therefore granted Grayscale’s request and reversed the SEC’s decision.
“…NYSE Arca presented substantial evidence that Grayscale is similar, across the relevant regulatory factors, to bitcoin futures ETPs. The Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP. In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful. We therefore grant Grayscale’s petition for review and vacate the Commission’s order.”
In short, if this is a “win”, Teucrium Trading NYSE Arca, Inc. already achieved it in April 2022.(2)
(1) Text of the Verdict as of the date of writing: https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/r_rvb0wcJNFM/v0
(2) SEC, NYSE Arca Bitcoin ETP : https://www.sec.gov/files/rules/sro/nysearca/2022/34-94620.pdf