On August 29, 2023, the D.C. Circuit Court of Appeals delivered the most recent blow to the SEC’s crypto crackdown with its ruling in Grayscale Investments, LLC v. SEC.  The decision was a big win for Grayscale and a clear repudiation of the SEC’s handling of Grayscale’s (and, implicitly, others’) spot Bitcoin ETF application under the Administrative Procedure Act (“APA”).

By way of background, in 2013, Gemini founders Tyler and Cameron Winklevoss first sought to launch a Bitcoin ETF.  The SEC rejected that application and, since then, has rejected all other applications to list spot Bitcoin ETPs (an Exchange Traded Fund is the most common type of Exchange Traded Product).  In each case, the SEC found the applicant was unable to meet the standard in Section 6(b)(5) of the Securities Exchange Act of 1934 which requires, in relevant part, that the rules of a national securities exchange (like NYSE Arca) be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”  In October 2021, the SEC approved two Bitcoin ETFs, but they were funds that traded in Bitcoin futures, not in Bitcoin themselves, finding in both instances that the relevant listing exchange had a surveillance sharing agreement with the Chicago Mercantile Exchange (“CME”) that the SEC viewed as satisfying its “significant market test.” See our post here.  Likewise, the SEC approved two additional Bitcoin futures ETFs in April and May 2022 relying on the same rationale.

In the Grayscale case, on June 29, 2022, the SEC rejected Grayscale’s application to convert the Grayscale Bitcoin Trust to a spot Bitcoin ETF listed on NYSE Arca.  It repeated its same position concerning Section 6(b)(5).  That same day, Grayscale filed a petition to review the decision with the D.C. Circuit. 

The D.C. Circuit’s ruling in the Grayscale case centered on the SEC’s application of the significant market test in deciding to reject Grayscale’s proposed Bitcoin ETF, and left the lawfulness of the test itself for another day.  Under the APA, to uphold the SEC’s decision, the Court only needed to find that the SEC’s decision was reasonable and reasonably explained.  Instead, however, the Court found that Grayscale provided substantial and salient evidence that its proposed spot Bitcoin ETF was materially similar on relevant regulatory factors to the Bitcoin futures ETFs approved by the SEC.  In particular, the Court found that:

(1) exposure to the spot market price was nearly identical for Bitcoin futures ETFs and the proposed Bitcoin spot ETF; and

(2) the listing exchanges for both types of ETFs had identical surveillance sharing agreements with the CME.

Thus, the risk of potential fraud was materially the same in both the spot and futures Bitcoin markets, and the surveillance sharing agreements to address that potential fraud were identical.  Given the materially similarities, commentators have remarked that it was unsurprising that the Court held the SEC’s decision denying the application as lacking a “reasonable and coherent explanation for these seemingly inconsistent results” and therefore arbitrary and capricious in violation of the APA.  The Court vacated the SEC’s decision and granted Grayscale’s petition for review without addressing the lawfulness of the significant market test itself.


The ruling does not mean Grayscale’s spot Bitcoin ETF is, or even will be, approved.  The SEC has 45 days from the date of the judgment to petition for a rehearing.  And, even if the SEC does not prevail in court, the decision means only that the SEC will be required to conduct a further review of Grayscale’s application consistent with the Court’s ruling and then decide whether to grant approval.  Moreover, following the decision, the SEC opted to delay its review on other pending spot Bitcoin ETFs.  Regardless, the Court’s ruling certainly seems to increase the possibility that the SEC will finally approve a spot Bitcoin ETF.

More generally, the Court’s decision marks another loss by the SEC on a major issue impacting the crypto industry in the US, following the decision in SEC v. Ripple Labs, Inc. a little over a month ago.  (See our post here.)  These losses reinforce the oft-repeated criticism of the SEC that it should be issuing guidance and regulations, rather than regulating through expensive litigation.  That is particularly so where the justification for a regulatory decision fails to meet even the relatively low bar of the APA that the Commission’s conduct be just be reasonable and coherent.  This regulatory approach is even harsher for less well-funded and smaller firms, and stifles innovation and progress in the US.


Gavin Meyers is a Counsel in Baker McKenzie's Transactional Practice Group in North America. Gavin is an experienced financial services regulatory lawyer and former FINRA attorney with a focus on representing broker-dealers, investment advisers, FinTech, and digital asset firms and projects on regulatory, enforcement and compliance matters involving US federal and state securities laws, FINRA rules, and federal and state money transmission and payments regulations.