Grayscale Initiates Lawsuit Against SEC Following Spot Bitcoin ETF Denial

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In what many see as a further blow to the crypto industry, and after several months of delay, the Securities and Exchange Commission (SEC) denied Grayscale Investments’ request to convert its Grayscale Bitcoin Trust (GBTC) to a spot Bitcoin exchange-traded fund (ETF). In turn, on June 29, Grayscale filed a petition for review with the United States Court of Appeals for the District of Columbia Circuit on behalf of Grayscale — challenging the decision by the SEC.

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Craig Salm, Grayscale Investments’ chief legal officer, told GOBankingRates that “last night we received the denial order. We were prepared for all possible outcomes. Unfortunately, we were denied, and we are very much dissatisfied and filed the petition for review — which is the first step.”

Salm said in a phone interview that Grayscale’s argument is “very clear, straightforward and persuasive,” the crux of which is that the SEC has approved futures ETFs and they should okay spot ETFs as well.

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He added that the regulators’ decision was “arbitrary and in violation of the Administrative Procedure Act and Securities Exchange Act of 1934.”

Asked what the timing of the legal process would be, Salm said that it could range from nine to 12 months, “but it could be longer or shorter.”

Last October, Grayscale Investments announced it had filed with the SEC for the conversion, saying it was the “natural next step in the product’s evolution.”

And in February, the firm launched a campaign encouraging investors to submit comments on its application with the SEC, which received a record 11,000 comment letters, according to Salm.

“And we are very encouraged by that,” he said.

While 2021 saw the first launches of several Bitcoin-linked ETFs, a pure-play, spot Bitcoin ETF is what many investors and analysts are hoping for. However, there has been continued stalling from regulators.

Investors and investment managers have anxiously been awaiting a decision from the SEC on the approval of Bitcoin ETFs, which would have to be traded on the “exchange” — in other words, on the stock market (and therefore, only during the hours the stock market is open). Right now, cryptos don’t have any such limitations and can be traded at any time. While several companies have filed crypto ETFs with the SEC — including VanEck and Fidelity — the commission has either rejected or delayed its decisions on many such filings.

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In a letter to investors posted on its website on June 29, Grayscale wrote that converting GBTC to a spot Bitcoin ETF “would have brought the world’s largest Bitcoin fund further into the U.S. regulatory perimeter and provided U.S. investors access to Bitcoin through the familiar protections of an ETF wrapper.”

The company added that as of June 29, 2022, GBTC shares traded at an approximately 30% discount to NAV, representing approximately $8 billion of unrealized shareholder value, according to the letter.

“We hold firm in our belief that converting GBTC to a spot Bitcoin ETF remains the best option for investors: it would effectively eliminate the discount and cause the shares to track the price of Bitcoin,” it read.

Budd White, co-founder of Tacen, told GOBankingRates that given the down market, this won’t be a blow to prices as the spot ETF was unlikely to see major inflows anyway.

“I think most in the industry will take it to be a sign that the government isn’t as far along as we thought they were on regulation. The Lummis-Gillibrand bill felt like a turning point, but SEC Chair Gary Gensler is still lagging behind everyone else in readiness to accept crypto,” White said.

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“I don’t think a spot ETF is even the most important thing for markets. In an ideal world, institutional investors would not have to use synthetic investment vehicles like the Grayscale Trust or a futures ETF.  With the recent collapse of so many centralized crypto businesses, I urge investors to purchase assets directly — “not your keys, not your crypto,” he said, adding that investing in a Bitcoin ETF will always be suboptimal to just owning Bitcoin, but its approval would be a sign that the regulatory apparatus has accepted crypto as a legitimate financial system.”

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Bitcoin was around $19,165 on June 30, 72.2% down from its Nov. 10, 2021 all-time-high of $69,044.77, according to CoinGecko. 

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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