Bitcoin rallies more than 7% as court sides with Grayscale over the SEC in crypto ETF case

The price of bitcoin surged Tuesday after the U.S. Court of Appeals for the DC Circuit ruled that the Securities and Exchange Commission was wrong to deny crypto investment giant Grayscale permission to convert its popular bitcoin trust into an ETF.

Bitcoin jumped about 7.5% following the ruling to $27,911.67, according to Coin Metrics. The move lifted cryptocurrencies broadly as well as crypto equities higher.

Grayscale’s lawsuit against the SEC has been closely watched by investors and other industry participants as a key catalyst that would shake up a market marred by low volatility and liquidity. Earlier this month bitcoin trading volatility fell to its lowest level in more than four years as investors had been waiting on the sidelines for more regulatory clarity on crypto activity – whether through new legislation out of Congress or through the ability to launch a spot bitcoin ETF.

Several bitcoin futures ETFs have already been approved in the U.S.

“The denial of Grayscale’s proposal was arbitrary and capricious … The Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP,” the court said in the ruling. “In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful. We therefore grant Grayscale’s petition for review and vacate the Commission’s order.”

Tuesday’s ruling may increase the chances that the SEC will approve other bitcoin ETF applications – including that of BlackRock, whose filing in late June drove one of bitcoin’s big rallies this year, as well as Fidelity, WisdomTree, VanEck and Invesco and others. A U.S. bitcoin ETF would provide a way to get exposure to bitcoin without having to hold it, which would invite retail and institutional investors as well as wealth managers into the market.

A spokesperson for the SEC said it’s “reviewing the court’s decision to determine next steps.”

“Today’s decision reaffirms that a bitcoin ETF in the U.S. is a matter of when, not if,” said Steve Kurz, Global Head of Asset Management at Galaxy, which filed with Invesco for its bitcoin ETF. “In order for digital assets to continue to flourish, they must be accessible to all investors. We believe that the ETF structure can enable greater access to and transparency across cryptocurrency investing, and truly help further democratize the asset class.”

The ruling also comes as a relief to many crypto market participants who have been frustrated by the SEC, particularly under Chair Gary Gensler, and its insistence on regulating by enforcement. The crypto industry has long sought out clarity in rules businesses can play by to establish and build long-lasting, compliant companies. The U.S. regulatory crackdown on crypto in 2023 — which includes and SEC enforcements and a lawsuit against the biggest U.S. crypto exchange — Coinbase, has been a dark cloud over the market.

Grayscale initiated its lawsuit against the SEC in June 2022 after the agency rejected its application to turn its bitcoin trust, better known by its ticker GBTC, into an ETF. The company decided to pursue the ETF, which would be backed by bitcoin rather than bitcoin derivatives, after the SEC approved ProShares’ futures-based bitcoin ETF in October 2021.

The ruling faced multiple delays but the SEC ultimately rejected the application last summer, citing failure by Grayscale to answer questions related to concerns about market manipulation and investor protections.

The Grayscale Bitcoin Trust itself jumped 16%.

—CNBC’s Jesse Pound contributed reporting.