Court Paves Way for First Bitcoin ETF in Grayscale Ruling

Grayscale Investments LLC got backing from a federal court to launch the first Bitcoin exchange-traded fund in the U.S., a watershed moment in the cryptocurrency industry’s quest to tap billions of dollars from everyday investors.

A three-judge appeals panel in Washington on Tuesday overturned a decision by the U.S. Securities and Exchange Commission to block the ETF.

“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” wrote Judge Neomi Rao.

Grayscale “advanced substantial evidence” that its product was similar to Bitcoin futures ETFs approved by the SEC. The underlying assets of both types of products are closely correlated and the surveillance sharing agreements with the Chicago Mercantile Exchange are “identical.”

Grayscale says converting to an ETF would help it unlock about $5.7 billion in value from the $16.2 billion trust by making it easier to create and redeem shares.

In June 2022, the SEC rejected Grayscale’s conversion proposal arguing that an ETF based on Bitcoin, which trades on unregulated markets, lacked adequate oversight to detect fraud. Grayscale sued to overturn the decision accusing the SEC of discriminating against its product, while approving similar Bitcoin futures ETFs.

Grayscale sought to create an ETF because the trust’s closed-end structure doesn’t allow for investors to redeem shares when prices fall, causing the trust to trade at steep discounts to its underlying Bitcoin. As an ETF, it could create and redeem shares to keep up with changing demand.