The US Court of Appeals for the D.C. Circuit grabbed the attention of legal and crypto communities when it ruled, in Grayscale Investments v. SEC, that the agency had acted unlawfully in denying Grayscale’s application for a Bitcoin exchange-traded fund or ETF.
Although the decision was a significant win for Grayscale and the crypto industry, commentators may have missed important nuance. The decision appears to reflect a technical application of standard administrative law doctrine—and perhaps not, as commentators have assumed, a blanket rebuke of the SEC’s reluctance to embrace crypto.
Grayscale Decision
The case stems from the SEC’s denial of Grayscale’s application to list a spot Bitcoin ETF, versus a Bitcoin futures ETF, on a national exchange. An ETF is an investment vehicle designed to track an asset’s value. While spot ETFs hold the asset itself, other ETFs hold derivates such as futures, which are contracts to buy or sell an asset at a predetermined price on a later date.
The SEC’s decision teed up a quintessential administrative law issue: whether the agency’s action was “arbitrary and capricious,” and therefore unlawful, under the Administrative Procedure Act or APA.
In a unanimous opinion, a three-judge panel ruled that the SEC’s action was indeed arbitrary and capricious, as the agency’s denial of Grayscale’s spot Bitcoin ETF couldn’t be squared with the agency’s prior approvals of Bitcoin futures ETFs.
According to the panel, the SEC’s inconsistent treatment of the products violated a bedrock principle of administrative law: An agency must treat like cases alike.
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 with spot Bitcoin ETFs—the panel rejected the SEC’s proffered distinctions.
For both products, the panel observed, the relevant surveillance-sharing agreements were identical and equally likely to detect fraud. The panel also highlighted the SEC’s failure to explain why fraud in the spot Bitcoin market was no obstacle to approving Bitcoin futures ETFs but was a basis to reject spot Bitcoin ETFs.
Significant But Limited Victory
Soon after, commentators celebrated the Grayscale decision as a resounding rebuke of the SEC’s reluctance to embrace, if not hostility toward, the crypto industry. They particularly emphasized the panel’s unanimity.
The opinion’s Trump-appointed author, Judge Neomi Rao, had joined an Obama-appointee, Judge Sri Srinivasan, and a Carter appointee, Judge Harry Edwards, to rein in the SEC and safeguard crypto from the agency’s power grab. Reports also seized on the harsh phrase that the panel had repeatedly employed to describe the SEC’s conduct: “arbitrary and capricious.”
Then again, to quote former D.C. Circuit Judge Abner Mikva, “‘arbitrary and capricious’ is a term of art in the hands of a reviewing court and has connotations less pejorative than the plain meaning of the words would suggest.”
The APA’s arbitrary-and-capricious review, as US Supreme Court Justice Brett Kavanaugh explained, requires a court to “ensure[] that the agency has acted within a zone of reasonableness and, in particular, has reasonably considered the relevant issues and reasonably explained the decision.”
Put simply by former Justice Byron White, the standard’s touchstone is “reasoned decision-making.” Across a broad array of subjects, courts have routinely applied this familiar formula to strike down agency actions as “arbitrary and capricious.”
From this perspective, the decision may not represent the resounding legal and political rout that the crypto community has deemed it. The case was technical, narrow, and the latest in a series of decisions reflecting methodical and dispassionate applications of APA arbitrary-and-capricious review.
The three panelists here—Judges Rao, Srinivasan, and Edwards—are known for their scholarly approaches to appellate judging and deep expertise in administrative law.
What Comes Next?
The SEC may petition for a rehearing with all the D.C. Circuit’s judges. But such en banc review requires a majority vote and is warranted only to “maintain the uniformity of the court’s decisions” or to resolve “questions of exceptional importance.” It’s doubtful the panelists’ peers would view this straightforward case as a worthy candidate.
The SEC may also petition the Supreme Court for certiorari review. But even assuming that the panel erred, the court isn’t in the business of mere error correction, and the decision—a run-of-the-mill application of the APA—doesn’t appear to raise an issue that would move the court to exercise its jealously guarded certiorari jurisdiction. Nothing is certain, however.
If the SEC doesn’t appeal the decision, it must comply. Yet the agency has room to maneuver. For example, the SEC could approve all spot Bitcoin ETF applications simultaneously—not only Grayscale’s, but also its competitors’—thus defeating any first-mover advantage.
Or the SEC could deny Grayscale’s application on an alternative ground. The SEC could even backtrack on its prior decision to approve Bitcoin futures ETFs. To comply with the equal-treatment principle, an agency need not equalize up—it may also equalize down.
Some of the Grayscale decision’s biggest winners are conventional investors and their financial advisers.
Compared with Bitcoin futures ETFs, spot Bitcoin ETFs permit investors to avoid roll costs—those generated in a futures market after an investor rolls a short-term contract into a longer-term contract.
And compared with directly purchasing Bitcoin, the ability to invest in a spot Bitcoin ETF might assuage investors, and their advisers, who seek exposure to Bitcoin but would find comfort in the familiarity of traditional investing.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Andrew L. Schwartz, partner at Kasowitz Benson Torres, defends companies in securities litigation with additional focus on cryptocurrency, blockchain, and distributed ledger technologies.
Amit R. Vora, special counsel at Kasowitz Benson Torres, focuses on appellate litigation and represents companies and individuals in constitutional, administrative, and financial matters.
Write for Us: Author Guidelines
