What to expect with the final Grayscale-SEC court mandate imminent

The Court of Appeals could choose to limit how the SEC may continue to deny GBTC’s conversion to an ETF, law partner says


Maksim Safaniuk/Shutterstock modified by Blockworks


A final order by the DC Circuit Court of Appeals in Grayscale Investments’ win over the US Securities and Exchange Commission could offer some clarity for those awaiting spot bitcoin ETFs.

Or not.

Language by the judges will matter, one lawyer noted, as the court might limit how the SEC can deny the conversion of the Grayscale Bitcoin Trust (GBTC) to an ETF — should it choose to — going forward.

Though the SEC decided not to challenge a court ruling that undermined its method to block GBTC’s proposed conversion, many still expect it could take weeks or months before bitcoin ETFs hit the market. 

The SEC’s chance to request a rehearing passed on Oct. 13. The DC Circuit Court of Appeals is now set to issue a “final mandate” within seven days of that date, a Grayscale spokesperson said in a statement.

The court may extend its time to issue a mandate, according to federal rules of appellate procedure. Because the SEC’s window to request a re-hearing expired late last Friday, the court’s order might not be published until Monday, a source familiar with the matter told Blockworks.    

“The Grayscale team remains operationally ready to convert GBTC to an ETF upon the SEC’s approval, and we look forward to sharing more information as soon as practicable,” a firm representative said.

Final ruling and what it could mean

As Grayscale — and the industry — await the court’s final mandate, one thing appears clear: The court will order the SEC to reconsider its decision to deny GBTC’s conversion to an ETF, according to Arie Heijkoop, partner at law firm Haynes Boone.

Still, details and scope of the court’s order — as well as the SEC’s upcoming move in response — remain unclear. 

The SEC has declined to comment on the suit. 

“I expect the court’s order will not go so far as to require the SEC to approve the application, because the court probably wants to preserve some deference in case the SEC finds other grounds on which to deny the application that it would consider valid,” Heijkoop told Blockworks.   

The regulator has not raised other significant concerns — such as custody issues — in previous spot bitcoin ETF denials or in its responses to Grayscale’s legal filings, the law partner added.

“So if it denies the GBTC application again on new grounds, that may be viewed skeptically by applicants and possibly a future court,” Heijkoop said. “It will be interesting to see if the court will use language in the order that effectively would limit how the SEC may continue to deny the application, such as stating explicitly that any such grounds have to be based on factors that do not apply to bitcoin futures.”

DC Circuit Court of Appeals judges said in an August ruling that the SEC allowing bitcoin futures ETFs, but blocking GBTC’s conversion to an ETF “was arbitrary and capricious.”

Grayscale on Thursday filed with the SEC a Form S-3 as part of continued efforts to convert GBTC to an ETF. A person familiar with the matter called the filing “more of a procedural milestone” for the firm to start conversations with another SEC division as the lawsuit concludes.

NYSE Arca, the exchange that would list the GBTC ETF, has not yet refiled a 19b-4 for this proposed product. Grayscale acknowledged Thursday that the SEC’s approval of a 19b-4 would be needed for the GBTC conversion.

In an X thread on Wednesday, Scott Johnsson, an associate at Davis Polk & Wardwell, pondered whether there would be a need to submit a new 19b-4. He noted that a 19b-4 is deemed approved if the SEC does not issue an order on it. Moreover, he pointed out that the Court of Appeals was set to vacate the SEC’s disapproval.

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Grayscale could use that point as leverage in talks with the SEC, which will probably request for the firm to refile a 19b-4, Johnsson said.

“I don’t expect the mandate issued on Friday by the DC Circuit Court will provide much clarity,” he wrote in an X post. “But it should be interesting to see if GBTC refiles and when. I do think refiling likely ends up being the path of least resistance.”

Beyond GBTC

SEC Chair Gary Gensler declined to comment on the regulator’s decision not to appeal the Grayscale court win in a Wednesday interview with Bloomberg TV.

He acknowledged that there are nearly a dozen spot bitcoin ETF filings that its staff is actively reviewing. The SEC’s disclosure review team gives feedback to potential issuers, Gensler added, declining to comment on such conversations. 

Indeed, issuers have updated bitcoin ETF filings with additional information in recent days — a potential sign of productive dialogue between the firms and regulators, executives and segment observers have said.

Read more: Another would-be bitcoin ETF player: ‘It’s going to get approved’

“It now seems more likely that the SEC has shifted gears and, rather than work to articulate new reasons for denying a spot bitcoin ETF, it is looking at the imminent approval of this application and, if so, likely the numerous other spot bitcoin ETF applications,” Heijkoop said.

The SEC’s deadline to decide on a spot bitcoin ETF by Ark Invest and 21Shares is Jan. 10. The regulator has until mid-March to decide on a bundle of other such proposals, including ones by BlackRock and Fidelity. 

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Heijkoop said it seems “significant” that the SEC’s approval of ether futures ETFs came after the August court ruling, which called out the disparate treatment of spot and futures products as problematic. 

“It would indicate the SEC approved the ether futures ETF applications knowing that it would then be scrutinized if it refused ETF applications for products that traded in the spot market,” he explained. 

The SEC allowed six ether futures ETFs by ProShares, VanEck and Bitwise to launch on the same day. This signals the regulator would likely look to permit a bunch of bitcoin ETFs, if greenlit, to start trading together, Heijkoop said.

He added: “I expect the SEC to grant approval to spot bitcoin applications, which may include Grayscale, possibly as early as the end of this year but more likely in early- to mid-2024.”

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