Grayscale Investments, LLC v. SEC

Court of Appeals for the D.C. Circuit
82 F.4th 1239 (2023)

ELI5:

Rule of Law:

Under the Administrative Procedure Act, an administrative agency acts arbitrarily and capriciously if it fails to treat like cases alike or fails to provide a reasonable and coherent explanation for treating materially similar situations differently.

Facts:

Bitcoin functions as a digital token recorded on a decentralized blockchain, with value determined by both a 'spot market' (immediate delivery of bitcoin) and a 'futures market' (contracts to buy/sell at a later date).
Grayscale operates the Grayscale Bitcoin Trust, which holds approximately 3.4 percent of all outstanding bitcoins, valued at billions of dollars.
Because Grayscale's shares are not listed on a national exchange, they lack share redemption mechanisms and often trade at a significant discount relative to the value of the underlying bitcoin assets.
Two other funds, Teucrium and Valkyrie, proposed listing 'futures ETPs' that hold bitcoin futures contracts rather than physical bitcoin.
Statistical evidence demonstrates a 99.9 percent correlation between prices in the bitcoin spot market and the bitcoin futures market on the Chicago Mercantile Exchange (CME).
Both the proposed Grayscale product and the approved futures products rely on identical surveillance-sharing agreements with the CME to detect fraud and market manipulation.
NYSE Arca proposed listing Grayscale's shares as an Exchange-Traded Product (ETP) to allow them to trade on a national exchange.

Procedural Posture:

NYSE Arca filed a proposed rule change with the Securities and Exchange Commission to list shares of the Grayscale Bitcoin Trust as an exchange-traded product.
The Securities and Exchange Commission issued a final order denying the proposed rule change.
Grayscale filed a petition for review of the Commission's order in the United States Court of Appeals for the District of Columbia Circuit.

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Issue:

Is the Securities and Exchange Commission's denial of Grayscale's proposal to list a spot bitcoin exchange-traded product arbitrary and capricious when the Commission previously approved materially similar bitcoin futures exchange-traded products?

Opinions:

Majority - Judge Rao

Yes, the Commission's denial was arbitrary and capricious because it failed to explain why it treated Grayscale's product differently than materially similar approved products. The Court reasoned that the Administrative Procedure Act requires agencies to treat like cases alike. Grayscale demonstrated that its proposed spot bitcoin ETP was materially similar to the approved bitcoin futures ETPs because the underlying markets are 99.9% correlated and both rely on the exact same surveillance-sharing agreement with the Chicago Mercantile Exchange (CME) to detect fraud. The Commission failed to explain why this surveillance agreement was sufficient for futures ETPs but insufficient for Grayscale's spot ETP, given that fraud in the spot market would inevitably impact the tightly correlated futures market. Consequently, the inconsistent treatment lacked a reasonable explanation.

Analysis:

This decision represents a significant check on administrative power regarding financial innovation, specifically within the cryptocurrency sector. It reinforces the 'hard look' doctrine under the APA, establishing that regulators cannot rely on generalized skepticism to block market access when empirical data (such as the 99.9% market correlation) contradicts their distinctions. The ruling effectively dismantled the SEC's long-standing refusal to approve spot bitcoin ETFs by highlighting that once the agency approved futures-based products, it could not logically exclude spot-based products without a coherent economic justification. This case sets a precedent that agencies must maintain consistency in their adjudicatory standards across similar asset classes.

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