Grayscale won, but not completely SEC can still reject BTC ETF

Grayscale won, but SEC can still reject BTC ETF.

Original | Odaily Planet Daily

Author | jk

Last night, the United States Federal Appeals Court ordered the U.S. Securities and Exchange Commission (SEC) to reconsider its decision to reject Grayscale Investments’ application to convert its Bitcoin Trust Fund (GBTC) into an Exchange Traded Fund (ETF). This decision is seen as a potential opening for ETFs in the industry, indicating the possibility of the first Bitcoin spot ETF in the future in the United States.

Timeline:

1. In 2021, Grayscale applied to convert its GBTC Trust into an ETF;

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2. The SEC subsequently rejected Grayscale’s application based on reasons such as “failure to prevent market manipulation”;

3. Grayscale then appealed to the appellate court, claiming that the SEC’s actions may violate the U.S. Administrative Procedure Act, as the SEC had already approved Bitcoin futures ETFs before making this decision, and there is no fundamental difference in risk between futures ETFs and Grayscale’s products;

4. On August 29, 2023, the court ruled in favor of Grayscale, requiring the SEC to reconsider Grayscale’s application.

Odaily Planet Daily needs to remind that the reason Grayscale filed the lawsuit is “Since the SEC has already approved other Bitcoin futures ETFs, and Grayscale’s spot ETF has the same risks and potential for market manipulation, the SEC cannot reject my application for this reason.” This is a judgment about procedural justice, not substantive justice.

Therefore, after the judge ruled in favor, it only requires the SEC to “reconsider”. This ruling does not require the SEC to directly approve Grayscale’s application, so legally, the SEC can still reject Grayscale’s application with a different reason for a spot ETF, if the SEC is determined to do so.

Background and Controversy

The case began in October 2021, when Grayscale Investments first applied to convert its closed-end fund GBTC into an ETF. However, the SEC rejected this application on the grounds that it did not address the SEC’s concerns about market manipulation prevention, among other things. In particular, the SEC has approved several ETFs related to Bitcoin futures, but has reservations about spot Bitcoin ETFs, which has sparked widespread questioning and discussion in the industry.

Reports show that at the time, two ETPs had already been approved.

Grayscale Investments was dissatisfied with this and filed an appeal less than an hour after the SEC’s rejection. Grayscale requested the U.S. Court of Appeals for the District of Columbia Circuit to reconsider the SEC’s decision and claimed that the SEC’s actions may violate the U.S. Administrative Procedure Act (ALianGuai).

Impact of the Court’s Decision

After Grayscale’s victory, it immediately sparked heated discussions in the industry. This not only opens the door for Grayscale itself, but also paves the way for other financial institutions such as BlackRock and Fidelity to apply for spot Bitcoin ETFs. That is, if the SEC cannot reject Grayscale’s application based on reasons such as market manipulation, and cannot find other reasons, it will need to approve Grayscale and all other spot Bitcoin ETFs.

Another impact is that analysts have long believed that converting from a closed-end fund to an ETF could completely eliminate the discount of GBTC, as ETFs allow for redemption and generally trade close to their fair value. The shift from trust to the new structure of an ETF means that investors or authorized participants will now be able to trade directly with the fund, rather than just on the secondary market. This typically helps reduce the deviation between the fund price and its net asset value, allowing investors to buy and sell closer to the net asset value. This change is advantageous for investors as it provides a more flexible and efficient trading mechanism. Therefore, this decision could bring in a significant amount of institutional capital as the current discount on Bitcoin could be a good investment target.

In addition to potentially eliminating the GBTC discount, this change also means that the fund will operate in a more regulated and formal environment. The change in the fund structure will register its shares under the 1933 Securities Act with the SEC and upgrade from the over-the-counter market to the New York Stock Exchange Arca.

Such a change may attract a wider range of investors, including those who prefer to invest in more rigorously regulated products. It may also make the investment tool more liquid and accessible.

Next Steps

Nevertheless, it is still unclear how the SEC will enforce this court order and what its final decision will be. According to Adam Cochran, a partner at Cinneamhain Ventures, the SEC has three options in response to the court ruling: defer the decision and provide new reasons for rejection; acknowledge and approve (the Grayscale ETF); or request an en banc appeal of the case. Key issues regarding market manipulation, investor protection, and regulatory oversight still need to be addressed.

However, it is undeniable that this court decision could be a significant turning point in cryptocurrency regulation and the availability of cryptocurrency investment products in the United States. This event has also sparked key questions about how regulatory agencies should handle new financial instruments based on emerging technologies. Overall, this development will be closely watched as it could have far-reaching implications not only for Grayscale Investments and GBTC, but also for the entire US cryptocurrency market and related financial products.

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