The US SEC has faced a significant setback as the United States Court of Appeals for the District of Columbia Circuit overturned a ruling by the regulator on the treatment of SPIKES Index securities. The court deemed the SEC’s order “arbitrary and capricious,” questioning the exemption granted in 2020, which had classified SPIKES Index as futures instead of securities futures.

The SEC’s 2020 Order and Its Implications

In 2020, the SEC issued an order that exempted the SPIKES Index, a stock volatility index, from being classified as security futures. This move aimed to eliminate heavy taxes and regulatory requirements associated with the term “security,” promoting competition among volatility indexes.

However, Chief Judge Sri Srinivasan criticized the exemption. He stated that the SEC had not adequately explained its rationale and had overlooked important aspects of the problem. Furthermore, the court noted that the SEC had not considered the potential confusion among market participants resulting from the grant of exemptive relief.

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Reversal of Decision, New Classification and Possible Impact on Crypto Firms

The recent decision by the Court of Appeals now designates SPIKES Index futures as “securities futures” instead of “futures.” As a result, market participants have been given a three-month period to wind down their transactions under the new classification.

According to the Clark County Bar Association’s definition, an agency action is considered “arbitrary or capricious” if the decision lacks a reasonable basis and appears to be a sudden turn of mind without any apparent motive.

This ruling may also have implications for the legal battles between crypto firms and the SEC. It is worth noting that two of the panel’s judges, who were part of this decision, are also examining Grayscale’s challenge against an SEC decision that denied a request to convert its Grayscale Bitcoin Trust to a spot Bitcoin exchange-traded fund (ETF).

Bloomberg’s ETF analyst Eric Balchunas highlights that this court decision demonstrates that the SEC is not invulnerable to losing a legal case. It further sheds light on its accountability and potential challenges to its regulatory decisions.

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