Grayscale Vs SEC: Grayscale’s Appeal Against SEC Ruling Takes Center Stage in US Appeals Court Today

Grayscale Investments, a digital currency asset manager, has been in a legal battle with the US Securities and Exchange Commission (SEC) over its proposed bitcoin exchange-traded fund (ETF) for several months. The dispute centers around the SEC’s rejection of Grayscale’s application to launch the ETF, which would have provided institutional investors an opportunity to invest in bitcoin without directly buying the cryptocurrency. According to reports, in a matter of hours, the U.S. District Court of Appeals will begin hearing Grayscale’s arguments against the SEC’s decision to deny its application for a spot Bitcoin ETF. The highly anticipated session will be broadcasted live here. 

Grayscale Vs SEC: Show Begins

In June 2022, the SEC turned down Grayscale’s application for a spot ETF, citing concerns that this type of investment vehicle poses a higher risk of fraud and fails to provide adequate safeguards for investors. The SEC also noted that Grayscale’s application lacked an effective fraud prevention and investor protection plan.

Following the SEC’s rejection, Grayscale promptly filed a lawsuit against the commission and began its legal battle, which has continued to this day.

The lawsuit arises amidst growing tension between the crypto industry and the SEC, which has intensified its efforts to regulate digital asset products, including those that provide investors with returns on specific digital tokens.

Grayscale’s appeal centers on the argument that a spot ETF is equivalent to a futures ETF, which the SEC has already approved, and therefore has no grounds to reject its application.

However, the SEC argues that the two are distinct because futures contracts are traded on public exchanges, such as the Chicago Mercantile Exchange, which is supervised by federal regulators. The SEC further notes that the CME implements robust surveillance measures to detect fraud and price manipulation.

Grayscale counters that both spot and futures ETFs rely on Bitcoin’s price and carry similar levels of risk, regardless of where they are traded.

The Outcomes Will Play A Major Role For The Crypto Market

On March 7th, federal appellate court judges will begin hearing the arguments and are anticipated to make a final decision in the upcoming months.

According to Bloomberg analysts, there is a probability of less than 50% that the judges will overturn the SEC’s decision, given the effectiveness of CME’s surveillance measures in detecting fraud and manipulation in futures-based ETFs. However, it remains uncertain whether such measures would be equally effective for spot ETFs.

The ruling of the case could either uphold the SEC’s position or establish a precedent for other companies to introduce spot bitcoin exchange-traded funds (ETFs) if the court rules in favor of Grayscale Investments LLC.

Grayscale’s chief legal representative, Don Verrilli, stated that the SEC’s differential treatment of similar matters serves to reinforce the company’s position. He further conveyed his confidence in the success of the appeal. He said, 

“The most basic way in which an agency can act in an arbitrary and capricious manner is to take like cases, like situations, and treat them differently. And, essentially, that’s what we have here.”