The U.S. Court of Appeals for the D.C. Circuit has released its full letter explaining its decision to rule in Grayscale’s favor in its lawsuit with the Securities and Exchange Commission (SEC).

The decisive 3-0 victory for the company is based on the SEC’s “unreasonable” justification for favoring futures ETFs over spot products, and its inability to provide evidence for its claims.

Grayscale’s Victory Explained

Per the court’s decision on Tuesday, the SEC “failed to adequately explain why it
approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP.”

Filed last year, Grayscale’s lawsuit against the SEC accused the agency of “arbitrary and capricious treatment” in denying the Bitcoin fund’s conversion into a Bitcoin spot ETF, despite previously approving multiple futures ETF of a similar nature.

Grayscale specifically pointed to the Teucrium and Valkyrie Bitcoin ETPs, which hold identical surveillance-sharing agreements (SSAs) with CME Bitcoin futures as what Grayscale proposed for its own product.

Therefore, the legal debate surrounded whether a market for Bitcoin futures could be used to adequately detect fraud in the spot market, upon which Grayscale’s ETF would be based.

According to the court, Grayscale won that debate.

“Grayscale presented uncontested evidence that there is a 99.9 percent correlation between bitcoin’s spot market and CME futures contract prices,” the court said. “Because the spot and futures markets for bitcoin are highly related, it stands to reason that manipulation in either market will affect the price of bitcoin futures.”

The SEC’s Insufficient Arguments

The SEC attempted to argue that CME Bitcoin Futures did not meet the threshold for a “market of significant size.”

This threshold has two prongs: that a market manipulator would need to trade on the market to manipulate the ETF, and that the proposed ETF would not be the “predominant influence on prices in [the surveilled] market.”

While the SEC originally fo