Grayscale Scores Win Against the SEC, but the Agency's Significant Market Test Remains Unaddressed

The D.C. Circuit rebuked the U.S. Securities and Exchange Commission ("SEC") on administrative law grounds but left untouched the test the Agency used to deny proposed bitcoin exchange traded products ("ETP").

On August 29, 2023, the Court of Appeals for the District of Columbia Circuit granted a petition from Grayscale Investments, LLC, vacating the SEC's order denying Grayscale's request to approve the exchange listing of its bitcoin ETP. 

The case represents a win for Grayscale on an administrative law challenge. According to the ruling, the proposed bitcoin ETP was substantially similar to two bitcoin futures ETPs that the SEC previously approved, and the SEC failed to treat like cases alike when it denied the listing of Grayscale's proposed bitcoin ETP while having approved the two bitcoin futures ETPs. Because the SEC did not adequately explain the disparate regulatory treatment of the Grayscale product as compared to similar products, the court held that the SEC's order was arbitrary and capricious.

So far, the SEC has denied every proposal to list a bitcoin ETP. Claiming that the bitcoin products failed to prevent fraud and manipulation, the SEC required a surveillance-sharing agreement with a related and regulated market of significant size—i.e., its "significant market test."

But the SEC had approved two bitcoin futures ETPs: NYSE Arca's proposal to list the Teucrium Bitcoin Futures Fund; and the Nasdaq's proposal to list the Valkyrie XBTO Bitcoin Futures Fund. Both had a surveillance-sharing agreement with the Chicago Mercantile Exchange ("CME") that the SEC found satisfied the significant market test. And both, like Grayscale's proposed bitcoin ETP, tracked the spot price of bitcoin. 

Yet when NYSE Arca proposed listing shares of Grayscale Bitcoin Trust with a CME surveillance-sharing agreement, the SEC found that the proposal failed the significant market test in part because bitcoin is not traded on the CME; and thus, the CME was not viewed as an appropriate market for the surveillance-sharing agreement.

Grayscale also challenged the SEC's significant market test as contrary to law, arguing that the test goes beyond the Exchange Act by requiring a surveillance-sharing agreement. But because the court invalidated the SEC's action as arbitrary and capricious, it declined to address that issue.

Insights by Jones Day should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request permission to reprint or reuse any of our Insights, please use our “Contact Us” form, which can be found on our website at This Insight is not intended to create, and neither publication nor receipt of it constitutes, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.