Grayscale Lawsuit Moves Forward as GBTC Discount Widens

Conversion to an ETF is the best way to close the discount, chief legal officer says, as firm expects SEC response to its first brief by Nov. 9

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Blockworks exclusive art by axel rangel

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key takeaways

  • A judge panel selection and a schedule of oral arguments are set to follow a series of written briefs due in late December
  • The Grayscale Bitcoin Trust (GBTC) was trading at a discount of 36.6% on Thursday

With cryptoasset manager Grayscale Investments filing its first brief against the SEC this week, the ball is now in the US securities regulator’s court. 

The litigation stems from the SEC denying Grayscale Bitcoin Trust’s (GBTC) proposed conversion to a spot bitcoin ETF — one of many similar denied attempts. The watchdog has only given the go-ahead to derivatives-based products. 

The lawsuit progresses as GBTC shares are trading at a widening discount to the underlying spot price of bitcoin — a persistent issue Grayscale Chief Legal Officer Craig Salm said could be fixed by overturning the SEC’s decision. 

Amicus briefs are due Oct. 18. The SEC is then scheduled to submit its own brief by Nov. 9, after which Grayscale can respond by the end of the month. 

The final briefs are scheduled to be due on Dec. 21.

“There’s an investor protection issue, here, and there’s a fairness issue, here — in many ways it’s not about bitcoin at all,” Salm told Blockworks. “It’s really just about equal treatment under the statute, so we’re looking forward to the SEC’s reply and then going from there.”

Following the briefs, a panel of three judges will be selected, and schedules for oral arguments will be drawn up. Salm, who previously said he expects the suit to take between nine and 12 months at the appellate level, said the anticipated timeline has not changed. 

The SEC declined to comment.

Grayscale: SEC’s decision “arbitrary”

Hours after the SEC rejected Grayscale’s application to morph its flagship product into an ETF, the company asked the US Court of Appeals for the District of Columbia Circuit to review the decision. Industry watchers, including Valkyrie Funds CEO Leah Wald, told Blockworks at the time that Grayscale would have a tough time winning the case.

The SEC rejected Bitwise’s application for a spot bitcoin ETF the same day.

Grayscale’s opening 100-page brief, filed Tuesday, claims the SEC “arbitrarily” treated a proposed spot bitcoin ETF differently than it treats the bitcoin futures ETFs it has already approved — familiar language shared in company statements in recent months. 

The firm has said repeatedly it believes the regulator is making an “arbitrary and capricious” action as defined by the Administrative Procedure Act (APA), which sets forth standards governing judicial review of decisions made by federal agencies.

Ark Invest Chief Operating Officer Tom Staudt told Blockworks the ETF issuer would continue its own efforts to launch a spot bitcoin ETF.

“We see this working well in other jurisdictions and don’t think that the US should lag behind those other countries in terms of innovation due to regulatory arbitrage,” Staudt said.

GBTC’s widening discount

Eligible shares of GBTC — with $12.3 billion in assets — are quoted on OTC Markets Group’s OTCQX. 

Those shares have traded at a substantial premium or discount to the value of bitcoin held by trust.

While Grayscale challenges the SEC’s decision to allow GBTC to become an ETF, the discount reached about 36.6% on Thursday, according to ycharts.com — up from roughly 32.6% a month ago. 

Though Grayscale parent company Digital Currency Group has previously launched programs to repurchase shares of its trusts, including GBTC, Salm said the firm is focused on the lawsuit.  

“The best way to address the discount is to allow GBTC to convert into an ETF,” he said. “The inherent mechanisms of all ETFs allow them to track the net asset value…so it would effectively eliminate premiums or discounts, and we continue to stand by that.”

The lawsuit takes place at a tough time for crypto prices, with hacks having ramped up in October.

The lack of spot bitcoin ETFs is not going to keep US investors from investing in bitcoin, Salm said, but rather could lead to people investing in a more risky manner. 

“It really shouldn’t matter…because the commission is not a merit regulator that makes determinations on whether or not investors should or should not be invested in something,” he said. “As long as the risks are adequately disclosed, an issuer has satisfied what it needs to do to have these products be approved.”


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