As others have said, this sort of thing isn't uncommon. When you see this sort of high rank attached to the founder of a system or the head of an organization or just an instructor who operates outside of an existing licensing organization then there are generally just a few ways that the rank is awarded:
- Self-promotion
- Promotion by students
- Promotion by a group of instructors from other systems or organizations, based either on mutual respect or just in exchange for reciprocal promotions
- Promotion via for-profit "diploma mill" kinds of businesses, which claim to grant rank based on resume, but really are there just to cash the check
This applies as much to famous masters like Jigaro Kano and Helio Gracie as it does to the 27 year old 10th dan "grandmaster" of Amerikwonkempo-jutsu teaching out of your local strip mall. Basically, if you have a hierarchical rank system based on promotions rather than objective competitive accomplishments (such as the ranks in Sumo and Sambo), then whoever has the highest rank in the hierarchy can't have been promoted by someone of higher rank.
The real question is whether it actually means anything in particular. I'm inclined to think not (except maybe as a chance to show your appreciation for your instructor and perhaps treat him to a nice dinner as part of the ceremony.)
To expand on that point ...
There are really only a few meaningful uses for martial arts ranks. Two of the common ones (organizing instructional curriculum based on the student's level or assigning athletes to divisions for tournament competition) are obviously not relevant to your instructor.
A use more relevant for rank as applied to instructors is as a chain of validation. I'll provide a couple of examples of how that might or might not be relevant in different cases.
I've been training and teaching for a while. Anyone who has a significant martial arts background and has trained with me probably has a useful enough idea of what my skills and knowledge are like. So for them my rank isn't particularly relevant. But for someone who was new to martial arts or new to the area and was considering coming to train with me, they might want to know in advance what my qualifications are. That's where the chain of validation comes in ...
I have a 3rd degree black belt in BJJ under Mike O'Donnell and Carlson Gracie Jr, which means those two individuals attest to my skills and knowledge. Well, does that mean anything? You can do a bit of research and see that Mike had some success as a mid-tier MMA fighter and trainer of other pro fighters and Carlson Jr has helped train a number of successful BJJ competitors. But maybe that's not enough, so you look at their ranks to see how those were awarded. Mike was promoted by Carlson Jr, and Carlson Jr was promoted by Carlson Sr. Carlson Gracie Sr was the top BJJ fighter of his generation and helped train a fair number of the top BJJ and MMA fighters of the following generation, so he probably knew something about the subject. If you wanted to take it one more step back, then Carlson Sr was promoted by Helio Gracie, who was one of the primary founders of BJJ.
So, despite the fact that I don't have much of a fight/competition record, my expertise in BJJ is affirmed by Mike (pro fighter and coach), whose expertise is affirmed by Carlson Jr (fighter/competitor/coach) whose expertise was affirmed by Carlson Sr (highly successful fighter and coach) whose expertise was affirmed by Helio (fighter/competitor/coach/founder). It's not a perfect system, but it gives potential students something to go on if they are considering checking out my classes.
Now, let's compare that situation to Helio Gracie himself. Helio was awarded the rank of 10th degree black belt by prominent members of the BJJ community (meaning primarily students or students of students of himself and his brothers). That doesn't really tell you much. If all you knew about Helio was that his students and grand-students gave him a rank, that wouldn't (or at least shouldn't) impress you much. If you know who Helio was, then you know about him because he and his brothers and their students were the primary developers of a branch of jiu-jitsu which proved itself in challenge matches against fighters of all sorts of disciplines at the highest level, first in Brazil and then internationally. That's his real rank and his real legacy. The fact that some of his students ended up awarding him a title and a belt rank doesn't really mean very much. If he hadn't done what he did, then no one would care about the titles awarded by his students.