The court will hear arguments in Grayscale’s lawsuit against the SEC over bitcoin funds

WASHINGTON, March 7 (Reuters) – Federal appeals court judges are set to hear arguments on Tuesday in Grayscale Investments’ case against the US Securities and Exchange Commission over the agency’s rejection of the crypto asset manager’s application to create a spot bitcoin exchange-traded fund.

The case comes as the crypto industry has been increasingly at odds with the SEC over its crackdown on digital asset products, including those that offer investors returns on certain digital tokens.

The case’s outcome could either offer vindication for the SEC’s stance, or pave the way for other companies to offer spot bitcoin exchange-traded funds (ETFs) if the justices rule in favor of Grayscale Investments LLC.

Other potential issuers of spot bitcoin ETFs rejected by the SEC include FMR LLC’s Fidelity, SkyBridge Capital and Valkyrie Investments Inc.

Valkyrie’s chief investment officer, Steven McClurg, said in a statement that his company does not believe a spot bitcoin ETF will be approved within the next year. A representative for Skybridge declined to comment, and Fidelity did not immediately respond to a request for comment.

Grayscale’s legal team plans to argue before the District of Columbia Court of Appeals in Washington that the SEC acted arbitrarily by rejecting applications for spot bitcoin ETFs when it had previously approved bitcoin futures ETFs, according to the company’s lead counsel.

Bitcoin futures ETFs track bitcoin futures contracts, or agreements to buy or sell bitcoin at a specific price on a specified date. A spot bitcoin ETF will track bitcoin’s underlying market price. Proponents say a spot bitcoin ETF would allow investors to gain exposure to bitcoin without buying it outright.

The SEC rejected Grayscale’s application to convert flagship site Grayscale Bitcoin Trust (GBTC) (GBTC.PK) into an ETF last June, arguing that the proposal did not meet standards aimed at preventing fraudulent practices and protecting investors. Grayscale sued the regulator almost immediately after the proposal was rejected.

“The most basic way an agency can act in an arbitrary and capricious way is to take similar cases … and treat them differently, and essentially that’s what we have here,” Donald Verrilli Jr., an Obama U.S. member – the time. The attorney general who is lead counsel for Grayscale told reporters in a briefing last week.

A spokesperson for the SEC declined to comment beyond the public documents in the case.

The agency has denied more than a dozen spot bitcoin ETF applications, all of which it said lacked monitoring-sharing agreements to detect potential manipulation.

Grayscale has argued in court filings that the SEC previously deemed agreements with the Chicago Mercantile Exchange — where bitcoin futures are traded — sufficient to prevent fraud in bitcoin futures-based ETFs, and that since both spot and futures funds rely on bitcoin’s price, the setup should also be satisfactory for Grayscale’s spot fund.

The company’s CEO, Michael Sonnenshein, has said that he expects a final decision in the case in the fall, and that he expects the court to rule in Grayscale’s favor. He told Reuters in January that Grayscale would appeal the case if the court upheld the SEC’s decision to reject its bitcoin ETF proposal.

Grayscale Bitcoin Trust, launched in 2013, has $14 billion in assets under management, according to Grayscale’s website. The GBTC discount to bitcoin is hovering around 45%, having come under pressure following the collapse of crypto exchange FTX in November.

If the legal challenge to the SEC was ultimately unsuccessful, Grayscale would explore options to return a portion of GBTC’s capital to shareholders, Sonnenshein told investors in a letter in December.

Reporting by Hannah Lang in Washington; editing by Jonathan Oatis

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