Grayscale Sues SEC Over Spot Bitcoin ETF Application Rejection

Key Takeaways

  • Grayscale has filed a petition for review before the U.S. Court of Appeals, challenging the U.S. Securities and Exchange Commission’s order denying GBTC’s conversion into a spot Bitcoin ETF.
  • Grayscale filed the lawsuit hours after the SEC denied its long-standing application for conversion, citing failure to meet numerous requirements under the Securities Exchange Act of 1934.
  • The fund’s chief legal strategist has accused the securities agency of acting “arbitrarily and capriciously” in violation of the relevant laws.

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The world’s largest digital asset manager, Grayscale, has filed a lawsuit against the U.S. Securities and Exchange Commission after the regulator rejected its application to convert its flagship Bitcoin trust fund into an exchange-traded fund.

Grayscale Challenges SEC in Court

Grayscale has filed a lawsuit against the SEC in a bid to have its verdict blocking the conversion of the Grayscale Bitcoin Trust into a spot Bitcoin exchange-traded fund repealed.

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In a Thurday press release, the world’s largest digital assets manager announced that it had filed a petition for review before the U.S. Court of Appeals, challenging the agency’s decision to deny the conversion of its flagship GBTC product to a spot Bitcoin ETF. The petition for review came hours after the SEC published its rejection of the firm’s long-requested application, citing failure to meet numerous requirements under the Securities Exchange Act of 1934. 

In the rejection order, the financial regulator argued that Grayscale had not done enough to protect investors and the public from “fraudulent and manipulative acts and practices.” Specifically, the agency cited long-standing concerns about the lack of a surveillance-sharing agreement between a listing exchange and a regulated market of significant size that it says is necessary to “detect and deter fraudulent and manipulative activity.”

Commenting on the SEC’s decision, Grayscale’s senior legal strategist and former U.S. Solicitor General, Donald. B. Verrilli, Jr., said that the SEC has failed “to apply consistent treatment to similar investment vehicles,” and had therefore acted “arbitrarily and capriciously” in violation of the relevant laws. “There is a compelling, common-sense argument here, and we look forward to resolving this matter productively and expeditiously,” he said.

Grayscale applied to have its GBTC investment trust converted into a spot Bitcoin ETF in October 2021, keeping in talks with the SEC following the application while publicly threatening legal action if its application got denied. Shares of the trust, which is supposed to track Bitcoin’s price, are currently trading at discount of roughly 28.4% to the fund’s net asset value. That’s because GBTC shares are not redeemable for the underlying Bitcoin holdings, preventing potential arbitrageurs from taking advantage of the price disparities by redeeming shares. Converting GBTC—the single largest Bitcoin investment vehicle, currently custodying over 3.4% of all Bitcoin in circulation—into an ETF would allow investors to redeem GBTC shares for the underlying Bitcoin, eventually bringing the fund’s share price to its intended parity with Bitcoin’s price.

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However, the SEC seems to believe that the apparent benefits of approving Grayscale’s application do not outweigh the potential harms for Bitcoin and GBTC investors. It remains to be seen whether the U.S. Court of Appeals agrees.

Disclosure: At the time of writing, the author of this article owned ETH and several other cryptocurrencies.

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