Grayscale Urges SEC to Approve Bitcoin Trust Conversion into ETF

Grayscale Investments has emerged victorious in court and is now urging the Securities and Exchange Commission (SEC) to swiftly allow the conversion of the Grayscale Bitcoin Trust into an exchange-traded fund (ETF).

Legal representatives of the company submitted a letter to the SEC on Tuesday, requesting a meeting with its staff to discuss the way forward. They argued that there are no legitimate reasons for the regulator to continue blocking the trust, which is identified by the ticker GBTC, from transforming into an ETF.

"Every day that goes by without listing the Trust's shares on NYSE Arca is another day that unfairly affects current investors," emphasized Joseph Hall, attorney at Davis Polk.

This letter follows a recent ruling by a panel of judges in the U.S. Court of Appeals for the D.C. Circuit, which determined that the SEC had made an error in rejecting Grayscale's proposal to convert GBTC into an ETF. The SEC's rejection was based on concerns regarding insufficient surveillance capability on Bitcoin trading platforms to detect fraudulent activities and market manipulation. However, the appellate judges unanimously declared that such reasoning was arbitrary and capricious, especially since the SEC had previously approved applications for ETFs that hold Bitcoin futures.

The SEC has until mid-October to request a broader panel of judges to review the decision. Alternatively, it could choose to appeal to the Supreme Court. Nevertheless, some experts in policy analysis are doubtful about the SEC's chances of succeeding in light of previous instances where the Supreme Court has limited regulatory actions.

"Considering how conservative members of the court have consistently restricted agency discretion, it is unlikely that the Supreme Court would rule in favor of the SEC," remarked Jaret Seiberg, a research analyst at TD Cowen, in a recent research note.

The Battle for a Bitcoin ETF: What's at Stake?

Many fund companies, including BlackRock, Fidelity, and WisdomTree, have been vying to launch a Bitcoin ETF of their own. To address the Securities and Exchange Commission's (SEC) concerns regarding fraud and manipulation, some of these companies have even formed surveillance partnerships with Coinbase Global. However, a recent court decision has called into question the necessity of such agreements.

While the SEC could potentially approve Bitcoin ETFs this year, there is a possibility that they might appeal the court decision, leading to further delays. Industry experts suggest that if an appeal occurs, potential approvals may not happen until 2024. This extended timeline would allow the SEC to thoroughly assess all the pending applications simultaneously.

The delay in approval has already disappointed investors in Grayscale's Bitcoin Trust (GBTC). Currently, GBTC trades like a closed-end fund, with its market price consistently below the value of the Bitcoin assets it holds. Although the market price experienced a significant increase on the day of the court victory, it still remains 20% below the value of the underlying Bitcoins. This slight improvement is only a marginal change from the pre-ruling situation.

As of Tuesday, GBTC shares saw a modest rise of 0.4%, trading at $18.55.

Aside from challenging Grayscale's victory, the SEC might also attempt to revoke its approval of futures-based Bitcoin ETFs as a countermeasure against claims of inconsistency in blocking spot-based funds. However, this course of action is considered risky due to the substantial investments already made in these products. The upcoming testimony of SEC Chair Gary Gensler before lawmakers is expected to shed light on the agency's future steps.

The SEC has refrained from commenting on this matter when approached on Tuesday. The agency stated last week that they are currently reviewing the court decision to determine their next course of action.