Grayscale’s GBTC shares rise after judges’ skeptical SEC decision to deny Bitcoin ETF

Barry Silbert, founder and CEO of Digital Currency Group, owner of Grayscale. Andrew Harrer—Getty Images

On Tuesday, a three-judge panel of the US Court of Appeals for the DC Circuit cast doubt on a decision by the US Securities and Exchange Commission to deny a Bitcoin spot exchange-traded fund, or ETF.

Shortly after the hearing, which produced a complaint from crypto firm Grayscale, shares of the company’s GBTC shares – which are backed by Bitcoin – surged more than 10% on a day when the broader market is down. By mid-day ET, GBTC shares were down slightly from their previous high, trading around $12.50.

Grayscale, represented by former Solicitor General Donald Verrilli Jr., argued that the SEC had been “arbitrary and capricious” in approving an ETF based on the Bitcoin futures market, but then denied Grayscale’s ETF based on the spot market.

The SEC, represented by senior counsel Emily Parise, countered that the futures market was regulated by the US Commodity Futures Trading Commission through a monitoring agreement with the Chicago Mercantile Exchange, while spot markets remain unregulated and subject to fraud and manipulation.

The three judges on the court—Judge Sri Srinivasan, Judge Harry T. Edwards and Judge Neomi Rao—expressed skepticism about the SEC’s position, and appeared to stand by Grayscale’s argument that the futures market relied on the spot market for its underlying pricing, and therefore would Fraud and manipulation affect both. Although Grayscale provided data showing the two markets were 99.9% correlated, Parese said that was not empirically sufficient.

“There seems to be quite a bit of information about how these markets work together,” Rao Parese asked. “The SEC has provided no explanation that the petitioners are wrong.”

James Angel, a faculty member at Georgetown’s Psaros Center to Financial Markets and Policy who specializes in market structure and financial regulation, told Fortune the justices seemed to understand Grayscale’s economic argument that the SEC accepted one product and arbitrarily rejected another.

Still, the case will likely come down to the doctrine of Chevron deference, which involves courts giving agencies like the SEC discretion to interpret statutes related to their expertise. Although the Supreme Court has recently reduced the amount of administrative deference, agencies such as the SEC generally have a broad mandate to interpret statutes—in this case, the Securities Exchange Act of 1934.

Although the justices seemed unconvinced by the SEC’s arguments, Angel said the outcome remains uncertain. “My crystal ball is cloudy,” he told me Fortune.

There is also a question of what would happen if the judges were to choose shades of grey. Rao asked Parise if the SEC would back down on its approval of the Bitcoin futures ETF. Parese said she could not speak for the commission, but that it would have to “rethink the matter.”

Grayscale, a subsidiary of crypto empire Digital Currency Group, currently runs the Grayscale Bitcoin Trust, a fund with nearly $15 billion in assets. When it was launched in 2013, it represented one of the first financial instruments for investors to access Bitcoin without buying it directly.

Although investors can buy shares in the trust, they cannot redeem them back into Bitcoin – a restriction that has caused the fund to trade at a significant discount to the price of the underlying Bitcoin. Verrilli claimed that converting the trust into a spot-based ETF would unlock $4 billion in value.

Even with an uncertain outcome, the rise in GBTC’s share price indicated that investors are optimistic that judges will side with Grayscale.