Judges on the U.S. Court of Appeals for the D.C. Circuit appeared to lean toward Grayscale Investments when it heard arguments Tuesday morning between the firm and the U.S. Securities and Exchange Commission in a lawsuit over regulator’s refusals to allow the $14 billion Grayscale Bitcoin Trust (GBTC) to convert into an ETF.
The outcome of the case could either vindicate the SEC’s consistent denial of spot cryptocurrency ETFs on the U.S. markets for the past several years or open the door for issuers to offer products covering one of the few asset classes that American ETFs have yet to track.
Chief Judge Sri Srinivasan and Judge Neomi Rao seemed skeptical of the SEC’s arguments that Grayscale had failed to show empirically that the spot price of bitcoin led the price of futures traded on the Chicago Mercantile Exchange. The panel hearing the case has three judges.
Speaking for the SEC, attorney Emily Parise argued Grayscale didn’t show evidence that an attempt to manipulate the intra-day price of spot bitcoin wouldn’t affect the end-of-day bitcoin futures contracts in a manner that would trigger the CME’s surveillance.
Several ETF issuers have argued the oversight of bitcoin futures by the CME extends to the spot markets.
But Judge Neomi Rao said the SEC approving Teucrium Trading’s Hashdex Bitcoin Futures ETF (DEFI) under the Investment Act of 1933 meant it had to have concluded that relying on surveillance in the futures market would extend into the spot markets since they are intertwined.
Srinivasan echoed that sentiment, saying Teucrium’s application wouldn’t have been approved if it wasn’t relying on the futures market surveillance as a proxy for surveillance in the spot price of bitcoin.
“If there’s manipulation in the spot market, that’s going to show up in the futures market and CME in particular enough that the surveillance mechanism is going to be able to detect it, and therefore we’re okay?” he asked.
Investors viewed the arguments favorably for Grayscale. GBTC rose 7% in trading as of noon Eastern Time, while its discount to its net asset value declined to around 40%, compared to a discount of approximately 44.5% as of close Friday.
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