On 29 August 2023, the United States Court of Appeals for the District of Columbia Circuit (Court) issued a decision siding with Grayscale Investments, LLC (Grayscale) and vacated the U.S. Securities and Exchange Commission’s (SEC) rejection of the NYSE Arca’s (NYSE) request for approval of a listing rule that would permit it to list shares of the Grayscale Bitcoin Trust (GBT) for trading.

In November 2021, the NYSE applied for a listing rule to allow trading in GBT but, on June 29, 2022, the SEC rejected the NYSE’s application based on its assertion that GBT was not designed to “prevent fraudulent and manipulative acts and practices” and failed to satisfy the “significant market test”. In June 2022, Grayscale filed suit against the SEC asking the Court to vacate the SEC’s order. Grayscale argued that the SEC’s rejection of the listing rule was unfair due to many factors including the SEC’s approval of listing rules for bitcoin futures exchange-traded products (ETPs), which are materially similar to GBT. A summary of the suit can be found here.

The Court found that the SEC’s rejection of the GBT listing rule was “arbitrary and capricious” because the SEC failed to explain its differential treatment of bitcoin futures and spot bitcoin ETPs.  In applying longstanding administrative law precedent, the Court stated that “similar cases should be treated similarly” and determined that the NYSE had presented in its listing rule application substantial evidence that GBT is similar, across all of the relevant regulatory factors, to bitcoin futures ETPs and as such should be afforded the same regulatory treatment. In reaching its decision, the Court noted that, among other things, the SEC failed to provide a coherent explanation of why ETPs that track the bitcoin market price by holding bitcoin directly as opposed to using bitcoin futures contracts should be treated differently, and why having identical surveillance sharing agreements with the Chicago Mercantile Exchange was sufficient for futures-based ETPs to satisfy the “significant market test” but was not sufficient for GBT.               

It remains to be seen what the next steps for Grayscale and GBT will be. The SEC has 45 days to appeal the Court’s ruling. Moreover, the Court’s decision does not order the SEC to approve the listing rule for GBT. Rather, it states that to deny the listing rule application without coherent explanation was unlawful. The SEC could forego an appeal and choose to reconsider and either (1) approve the spot bitcoin ETP listing rule application with respect to GBT, or (2) deny and issue a new order with a more robust and coherent explanation of differences between bitcoin and bitcoin futures ETPs.