Grayscale’s Legal Debacle: Will The SEC Approve A Spot Bitcoin ETF?

Asset management firm Grayscale shall submit its latest brief in the ongoing case with the United States Securities and Exchange Commission (SEC), according to a tweet from chief legal officer Craig Salm. 

In the filing, the asset manager will argue that the SEC erred in rejecting the proposal to transform GBTC (Grayscale Bitcoin Trust) product into a spot Bitcoin ETF.

Salm elaborated: 

“Our lawsuit is about determinations on *questions of law*. Despite the SEC’s historical reluctance, or current perceptions of the crypto industry more generally, this is a legal case about fair and equal treatment under the law.”

Therefore, the actions of Terra/LUNA, 3AC, Celsius, Voyager, FTX, Alameda, BlockFi, Genesis Capital, Gemini, DCG, or anybody else, as well as any conjecture about such actions, are irrelevant to the final issue the Court must determine.

The argument here is whether or not the SEC acted arbitrarily and capriciously and discriminated against issuers when it authorized ETFs that carry bitcoin futures (a derivative of BTC) but denied the conversion of $GBTC to a spot bitcoin ETF.

Spot Bitcoin ETFs are in high demand in the United States, and for good reason. These exchange-traded funds (ETFs) would make Bitcoin more accessible to people who want to hold it as a security in a brokerage or retirement account through a regulated investment vehicle that files regular SEC reports, has audited financials and has tax documents on file, says Salm.

To the CLO’s point, the 850k+ GBTC shareholders are the ones who stand to benefit the most from this decision. They believe that by switching GBTC to a spot bitcoin ETF, the existing discount to NAV may be eliminated, freeing up roughly $4 billion in value.

Over the long run, an exchange-traded fund (ETF) is the most reliable method to monitor the value of bitcoin held in GBTC. This has always been the plan for Grayscale’s many crypto investment funds, including GBTC, Grayscale Ethereum Trust (ETHE), and others.

The Grayscale CLO emphasized that:

“We have the best legal minds representing GBTC shareholders in the DC Circuit Court of Appeals.”

Although he did add that, should their legal action fail, the asset management firm is committed to looking at other options for restoring funds to GBTC stockholders.

Why is Grayscale Suing the SEC?

On June 29, 2022, the day the SEC rejected Grayscale’s application, the company filed a lawsuit against the agency. Grayscale claimed that the SEC’s approval of some bitcoin futures ETFs was unlawfully discriminatory because it favored one kind of product over another (meaning futures over spot ETF).

In response, the SEC filed a document indicating that there are material disparities between the devices’ abilities to identify and prevent fraud and manipulation.

According to the SEC, unchecked spot ETFs might be vulnerable to fraudulent and manipulative behavior such as wash trading, price manipulation by whales, malevolent control of the Bitcoin network, hacking, insider trading, manipulative activities using putative stablecoins, and fraud at cryptocurrency exchanges.