What happened
On 29 August 2023 the United States Court of Appeals for the District of Columbia Circuit decided Grayscale Investments, LLC v. Securities and Exchange Commission, No. 22-1142. The opinion is by Circuit Judge Rao, sitting with Chief Judge Srinivasan and Senior Circuit Judge Edwards.
It opens with the rule it applies: "It is a fundamental principle of administrative law that agencies must treat like cases alike." Grayscale had sought to convert its bitcoin trust into an exchange-traded product listed on NYSE Arca. The Commission refused. The court granted Grayscale's petition and vacated the order.
What it changes
The mechanism is judicial review under the Administrative Procedure Act, which directs a court to set aside agency action that is "arbitrary and capricious". That is not a review of whether the agency reached the right answer. It is a review of whether the reason the agency gave holds together.
In 2022 the Commission approved two bitcoin futures products, Teucrium in April and Valkyrie the following month, reasoning that surveillance sharing with the regulated CME futures market was enough to detect manipulation. NYSE Arca put evidence in the record that CME futures prices and spot prices track each other at a 99.9 percent correlation, and that the correlation is not coincidence, since futures prices are derived from spot prices.
The court followed that to its conclusion. If the two markets are that tightly linked, fraud in the spot market shows up in futures prices, so surveillance of the futures market catches spot manipulation just as well. The Commission never explained why the same reasoning supported one product and not the other, and without a coherent explanation, unlike treatment of like products is unlawful.
What it does not change
It does not order the Commission to approve anything. The court vacated an order. It did not decide the merits, and it expressly declined to reach Grayscale's remaining arguments once it had set the order aside on this one. An agency that loses on its explanation is free to write a better explanation.
It also decides nothing about bitcoin. No part of the opinion concerns whether a spot product is a good idea, how the asset behaves, or who should hold it. The subject is an agency's consistency with its own prior decisions.
And it changes nothing about what such a product would be. A share in a trust is a claim on a trust. It is not a coin anyone can move.
Context
The Commission had been refusing applications of this shape for years, including the 2018 order the opinion cites at 83 Fed. Reg. 37,579. The test it applied asked the listing exchange to show a comprehensive surveillance-sharing agreement with a regulated market of significant size, or else that the product was otherwise resistant to manipulation.
The 2022 futures approvals are what made this case possible. By approving something, the Commission created a comparator, and a comparator is exactly what an arbitrary and capricious claim of this kind needs. An agency that had denied everything would have had nothing to be inconsistent with.