The US Court of Appeals for the DC Circuit drew the attention of the legal and crypto communities when it ruled, in Grayscale Investments vs. SECthat the agency had acted illegally by denying Grayscale's application for a Bitcoin exchange-traded fund, or ETF.
Although the decision was a significant victory for Grayscale and the crypto industry, commentators may have overlooked important nuances. The decision appears to reflect a technical application of standard administrative law doctrine and perhaps not, as commentators have assumed, a general rebuke of the SEC's reluctance to embrace cryptocurrencies.
Grayscale decision
The case arises from the SEC's decision. denial of Grayscale's application to list a Bitcoin spot ETF, versus a Bitcoin futures ETF, on a national exchange. An ETF is an investment vehicle designed to track the value of an asset. While spot ETFs hold the asset itself, other ETFs hold derivatives such as futures, which are contracts to buy or sell an asset at a predetermined price at a later date.
The SEC's decision fueled a quintessential administrative law question: whether the agency's action was “arbitrary and capricious” and therefore illegal, under the Administrative Procedure Act, or APA.
By unanimous opinion, a panel of three judges ruled that the SEC's action was in fact arbitrary and capricious, as the agency's denial of Grayscale's Bitcoin spot ETF could not be squared with the agency's prior approvals of Bitcoin futures ETFs.
According to the panel, the SEC's inconsistent treatment of products violated a fundamental principle of administrative law: an agency should treat similar cases equally.
Although the SEC had attempted to thread the needle between them, noting that Bitcoin futures ETFs enjoy superior market surveillance and fraud detection mechanisms compared to Bitcoin spot ETFs, the panel rejected the SEC's proposed distinctions. .
For both products, the panel noted, the relevant shared monitoring arrangements were identical and equally likely to detect fraud. The panel also noted that the SEC did not explain why fraud in the Bitcoin spot market was not an obstacle to approving Bitcoin futures ETFs, but was instead a basis for rejecting Bitcoin spot ETFs.
Significant but limited victory
Shortly after, commentators celebrated the Grayscale decision as a resounding rebuke to the SEC's reluctance to embrace, if not hostility, toward the crypto industry. The unanimity of the panel stood out especially.
The opinion's Trump-appointed author, Judge Neomi Rao, had joined with an Obama appointee, Judge Sri Srinivasan, and a Carter appointee, Judge Harry Edwards, to rein in the SEC and safeguard cryptocurrencies from scrutiny. of agency power. The reports also seized on the harsh phrase the panel had repeatedly used to describe the SEC's conduct: "arbitrary and capricious."
Then again, to appointment Abner Mikva, former DC Circuit Judge, “'arbitrary and capricious' is a term of art in the hands of a reviewing court and has less pejorative connotations than the simple meaning of the words would suggest.”
The Arbitrary and Capricious Review of the APA, as US Supreme Court Justice Brett Kavanaugh Says explainedrequires a court to “ensure[] that the agency has acted within a zone of reasonableness and, in particular, has reasonably considered the relevant issues and has reasonably explained the decision.”
Put simply According to former judge Byron White, the touchstone of the rule is “reasoned decision-making.” Through a broad training On many issues, courts have routinely applied this familiar formula to brand agency actions as “arbitrary and capricious.”
From this perspective, the decision may not represent the resounding legal and political defeat that the crypto community has considered it to be. The case was technical, limited, and the latest in a series of decisions reflecting dispassionate, methodical applications of the APA's arbitrary and capricious review.
The three panelists here, Justices Rao, Srinivasan, and Edwards, are known for their academic approaches to judging appeals and their deep experience in administrative law.
What comes next?
The SEC can request a rehearing with all judges of the DC Circuit. But such on bench review requires a majority vote and is justified only to "maintain the uniformity of the court's decisions" or to resolve "matters of exceptional importance." It is doubtful that the panelists' peers would consider this simple case as a worthy candidate.
The SEC can also petition the Supreme Court for certiorari review. But even assuming that the panel made an error, the court is not simply engaged in correcting the error, and the decision (a run-of-the-mill application of the APA) does not appear to raise an issue that would move the court. court to exercise its jealously guarded authority certiorari jurisdiction. However, nothing is certain.
If the SEC does not appeal the decision, it must comply. However, the agency has room to maneuver. For example, the SEC could approve all Bitcoin spot ETF applications simultaneously (not just Grayscale's, but also those of its competitors), thus negating any first-mover advantage.
Or the SEC could deny Grayscale's application for an alternative reason. The SEC could even reverse its previous decision to approve Bitcoin futures ETFs. To comply with the principle of equal treatment, an agency does not need to equalize upwards; You can also equalize down.
Some of the Grayscale The biggest winners from this decision are conventional investors and their financial advisors.
Compared to Bitcoin futures ETFs, Bitcoin spot ETFs allow investors to avoid rollover costs, those incurred in a futures market after an investor converts a short-term contract into a long-term contract. longer term.
And compared to buying Bitcoin outright, the ability to invest in a spot Bitcoin ETF could reassure investors and their advisors, who seek exposure to Bitcoin but would find solace in the familiarity of traditional investing.
This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or their owners.
Author information
Andres L. Schwartzpartner at Kasowitz Benson Torres, defends companies in securities litigation with special attention to cryptocurrencies, blockchain and distributed ledger technologies.
Amit R. VoraSpecial counsel to Kasowitz Benson Torres, he focuses on appellate litigation and represents companies and individuals in constitutional, administrative and financial matters.
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