The Securities and Exchange Commission (SEC) appears to be backing down from challenging a major court loss against Grayscale Investments, according to an unnamed source familiar with the matter. This development brings the possibility of the first Bitcoin exchange-traded fund (ETF) closer to reality.

The SEC had until midnight on Friday to request a new hearing in its case against Grayscale Investments. In that case, a panel of judges ruled that the SEC acted arbitrarily and capriciously when it rejected the firm's proposal to convert the Grayscale Bitcoin Trust (ticker: GBTC) into an ETF.

The SEC's argument was that Bitcoin trading platforms lacked sufficient surveillance capabilities to detect fraud and manipulation. However, the judges at the U.S. Court of Appeals for the D.C. Circuit agreed with Grayscale that this argument didn't hold up, especially considering the agency's prior approval of exchange-traded products holding Bitcoin futures.

Although all three judges were unanimous in their ruling, the SEC still had the option to request an "en banc" hearing in front of all the appellate court judges. However, according to the source, the agency has decided against taking that step.

Currently, the Grayscale trust functions as a closed-end fund, with its price deviating significantly from the value of the Bitcoin it holds. As of Friday's close, the trust's price was $20.24, around 15.9% below its asset value. If the trust successfully converts into an ETF, this discount is likely to close.

Moreover, this move is seen as a strong indicator that the SEC is inching towards allowing spot Bitcoin ETFs to enter the market. Companies like BlackRock (BLK), Fidelity Investments, and Invesco (IVZ) have already submitted applications to launch Bitcoin ETFs.

However, it should be noted that the SEC still has the option to deny Grayscale's application on different grounds not addressed by the court ruling. Additionally, Grayscale and other fund firms must obtain further approvals to bring their products to market.

Nonetheless, this decision on Friday is a critical signal that Bitcoin ETFs are edging closer to becoming a reality.

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