D.C. Circuit Court vacates the SEC's denial of GBTC's exchange listing

In what is being viewed as a big win for the crypto industry in general, and for the sponsors of potential spot bitcoin ETPs in particular, the D.C. Circuit Court of Appeals vacated the SEC's June 2022 denial of NYSE Arca's proposed rule change that would have permitted the Grayscale Bitcoin Trust (GBTC) to list its shares on the exchange.

After the SEC's denial, Grayscale sued under the Administrative Procedures Act, arguing that the denial of GBTC's listing was "arbitrary and capricious" in light of the SEC's approval of similar bitcoin futures-based ETPs. The Court agreed, finding that GBTC was similar to SEC-approved bitcoin futures ETPs.

The Court then analyzed the SEC's test for whether NYSE Arca had a surveillance sharing agreement (SSA) in place with a "regulated market of significant size," enabling it to assess whether market manipulation will be detected in the market subject to the SSA. The test has two prongs:

• First, there must be “a reasonable likelihood that a person attempting to manipulate the ETP would … have to trade on [the related] market to successfully manipulate the ETP”; and
• Second, it must be “unlikely that trading in the ETP would be the predominant influence on prices in [the surveilled] market.”

The Court found that the SEC failed to reasonably explain why it approved the listing of two bitcoin futures ETPs, but not GBTC's similar proposal. The Court also found that the SEC failed to provide a sufficient reason for finding that the CME's bitcoin futures markets was sufficiently large to be able to avoid manipulation so as to justify the approval of bitcoin futures-based ETPs, but not sufficiently large relative to the deeper and more liquid spot bitcoin markets so as to justify approval of GBTC's listing. The Court concluded "The [SEC] failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale's proposed bitcoin ETP. In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful."

The Court's action does not necessarily mean that GBTC (or anyone else) will be able to list shares of a spot bitcoin ETP any time soon. The SEC could potentially appeal the ruling, and the appeals process can take time. In addition, even if the SEC did not appeal the ruling, in order to list GBTC's shares on the exchange, it may be necessary for NYSE Arca to make a new filing on behalf of GBTC.

And while the SEC cannot reject any new GBTC filing on the same "arbitrary and capricious" basis as they did previously, the SEC can find another reason to deny the new proposal – which would then be subject to another appeal by GBTC to the DC Circuit – so there is no guarantee any new proposal will be approved. Further, it is unclear whether the SEC's Division of Corporation Finance is prepared to approve GBTC's registration statement, which would be required before GBTC's shares could be listed on the exchange.

Ropes & Gray is preparing a client alert on the Court's decision. We will be continuing to monitor developments in this important and impactful case.