The first bitcoin spot ETF is potentially closer to hitting the market after an appeals court ruled in favor of Grayscale in a highly anticipated case with the U.S. Securities and Exchange Commission (SEC) Tuesday.

The Court of Appeals for the Washington, D.C. circuit said the SEC did not provide sufficient reasoning for blocking crypto asset management firm Grayscale Investments' conversion of its Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund (ETF) to be listed on NYSE Arca.

What Was Grayscale's Bitcoin ETF Case Against the SEC?

Grayscale originally filed a lawsuit against the SEC in October 2022 after the regulatory agency denied the firm's application to launch a spot bitcoin ETF.

While a number of bitcoin ETFs based around futures products had already been approved, a spot bitcoin ETF still doesn't exist in the U.S. Many spot bitcoin ETF proposals have been rejected by the SEC in the past, but several more recent applications are currently under review, including an application from investment giant BlackRock.

In its original filing against the SEC, Grayscale argued a spot bitcoin ETF would not be sufficiently different or more dangerous from the sorts of futures-backed bitcoin ETF products that have already been approved. Most notably, Grayscale argued that the spot and futures markets for bitcoin are 99.9% correlated. "The Commission neither disputed Grayscale's evidence that the spot and futures markets for bitcoin are 99.9 percent correlated, nor suggested that market inefficiencies or other factors would undermine the correlation," Tuesday's ruling said.

What Would a Spot Bitcoin ETF Mean For the Market?

The SEC has long argued against the launch of a bitcoin spot ETF, saying there is too much potential for rampant fraud and manipulation in the market.

Tuesday's ruling doesn't mean the approval of a spot bitcoin ETF application is imminent. Instead, the SEC will need to review Grayscale's application again and provide a clearer explanation in a situation where it is denied once more. The launch of a spot bitcoin ETF has long been viewed as a potential boon for the bitcoin price, as some pension funds and other major financial players have strict guidelines to follow in terms of what they can do with their customers' funds. Additionally, a spot bitcoin ETF could be seen as a regulatory and reputational stamp of approval for bitcoin, leading to greater acceptance of the crypto asset among mainstream financial institutions and investors.

In response to the court's opinion on the Grayscale bitcoin ETF lawsuit against the SEC, the bitcoin price rose more than 6%.