Major digital asset manager Grayscale has filed a lawsuit against the Securities and Exchange Commission (SEC) for its rejection to allow the conversion of its $12 Billion Grayscale Bitcoin Trust (GBTC) to spot Bitcoin ETF (Exchange Traded Fund).
GBTC has more than 600,000 BTC in custody, which represents more than 3% of the circulating supply. The trust provides exposure to BTC without actually managing it.
In October 2021, Grayscale filed a petition to convert its flagship project GBTC into spot BTC ETF. If approved this would allow the new ETF product to be traded like a stock on a national security exchange like NYSE Arca or NASDAQ.
In June 2022, the SEC rejected the proposal citing that it failed to meet consumer protection requirements which should have included measures that are designed to prevent fraudulent and manipulative acts and practices.
In a filing, the SEC also rebutted that the NYSE Arca – the supposed marketplace for the proposed BTC ETF – did not have an agreement to monitor the price of BTC for manipulation with another regulated market that trades a “significant” amount of BTC.
On June 29, 2022, Grayscale’s legal adviser filed a petition for review with the United States Court of Appeals for the District of Columbia Circuit as a first step in contesting the SEC’s decision.
On Oct 12, 2022, Grayscale announced in a tweet that they have already filed their opening brief against the SEC. A legal brief is a written argument that clarifies and highlights certain information in an attempt to persuade the court.
The tweet further reiterates Grayscale’s disappointment and they are prepared for all possible outcomes. It has also alluded that the SEC’s “market test” is flawed and does not protect investors.
Grayscale’s tweet is also questioning why the SEC approved BTC ETF Futures while denying spot BTC ETFs, even though they carry the same risk and derive their price from the same underlying BTC market.
The SEC approved two BTC Futures ETFs in May 2022.
To date, no application for spot Bitcoin ETF has been approved by the SEC. The latest rejection was against WisdomTrees’s application.
What can we expect with the case?
According to the appellate phase timeline shared by Grayscale, it would take a while before we can have any regulatory clarity or conclusion. We also have to remember that SEC is currently in a court battle with Ripple Labs, the creator of XRP. While the 2 cases are totally different, this is a reminder that the cryptocurrency space is still young and laws and regulations need to be clarified and amended for us to move forward.
According to the SEC website, their mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The question is if they have really stayed true to this mission by rejecting spot BTC ETFs. That is a question that only the court can answer.
