A court opinion gave Grayscale Investments a win in its case against the Securities and Exchange Commission over its application for a spot bitcoin exchange-traded fund.

Bitcoin's price spiked on the news, rising 5.4% to $27,450 at 10:46 a.m. ET, according to CoinGecko. 

The move could have broad implications as a slew of firms have applied for spot bitcoin ETFs over the past few months from big names such as BlackRock and Fidelity.

Under the judges' opinion, the SEC has to re-review Grayscale's ETF proposal, said Jenn Rosenthal, Grayscale's head of communications. 

The court specifically addressed the SEC's treatment of spot bitcoin ETFs and bitcoin futures ETFs in the opinion. Grayscale showed in its proposed bitcoin ETF that it is similar to already approved bitcoin futures ETFs in both the underlying assets and in surveillance sharing agreements so should have "the same likelihood of detecting fraudulent or manipulative conduct in the market for bitcoin and bitcoin futures," the court said.

Court says SEC was 'arbitrary and capricious'

"The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products," the opinion stated. "We therefore grant Grayscale’s petition and vacate the order."

The SEC has the next 45 days to request an en banc hearing, meaning a rehearing with all three judges. After 45 days, the court will issue a final mandate that will have details on what happens next.

"Today, the D.C. Circuit ruled in favor of Grayscale in our lawsuit challenging the SEC’s decision denying GBTC’s conversion to an ETF," a Grayscale spokesperson said.

"This is a monumental step forward for American investors, the Bitcoin ecosystem, and all those who have been advocating for Bitcoin exposure through the added protections of the ETF wrapper," the spokesperson continued. "The Grayscale team and our legal advisors are actively reviewing the details outlined in the Court’s opinion and will be pursuing next steps with the SEC. We will share more information as soon as practicable."

Grayscale's case against the SEC

Grayscale brought a case against the SEC last year for rejecting its proposal to convert its flagship fund, GBTC, into a spot bitcoin ETF. Don Verrilli, lead counsel for Grayscale, said during oral arguments in March that the SEC is contradicting itself by allowing bitcoin futures ETFs, but not a spot bitcoin ETF.

The SEC has not yet approved of a spot bitcoin ETF, citing concerns over fraud and manipulation. The agency first allowed a bitcoin futures ETF to trade in 2021.

The SEC has said that futures products are harder to manipulate as the market is based on futures prices from the CME, which is Commodity Futures Trading Commission-regulated.

With the win, it will be more likely for spot bitcoin ETFs to avoid the SEC’s disapproval, said Vivian Fang, a finance professor at Indiana University. The SEC can’t keep saying no, people will challenge them legally, Fang said.

"It doesn’t look good to keep losing in the court,” Fang added. “Even though they’re the boss that decides yes or no, getting themselves into a lawsuit doesn’t put them in a positive light."

What happens next

The SEC has two likely options, said Nathan Geraci, president of The ETF Store, an advisory firm. The agency can either approve the conversion of GBTC into an ETF or they can deny it for some other reason, Geraci said.

"There is a third scenario where the SEC could force the closure of existing futures-based bitcoin ETFs, but that seems unlikely given they recently allowed the Volatility Shares 2X Bitcoin Strategy ETF (BITX) to come to market," Geraci said.

BITX started trading in June after not being rejected by the SEC and looks to provide two times the return of a bitcoin futures index on a daily basis.

(Updates with additional details from ruling, bitcoin price, comment from Grayscale.)