Grayscale Bitcoin Trust vs SEC

Following the SEC’s decision not to convert the Grayscale Bitcoin Trust into an ETF, Grayscale has decided to drag the exchange regulator into court.

We’ve filed the opening brief in our lawsuit against the SEC, challenging their decision to deny our application to convert $GBTC to a spot Bitcoin ETF.

A “brief” thread:

— Grayscale (@Grayscale) October 12, 2022

When with yet another negative decision the SEC led by Gary Gensler a few weeks ago rejected Grayscale’s new spot Bitcoin ETF, the top management of the largest fund that invests in cryptocurrencies decided to go all the way and take the US securities regulator to court.

It was in some ways a resounding decision, because it represents the first case of a crypto company suing an authority such as the SEC, which on its part has instead opened investigations into dozens of companies in the sector.

It is no coincidence that many companies in the industry, such as Coinbase, for example, immediately backed the fund’s lawsuit with an amicus brief, which is a document filed by a company or organization or individual that is not involved in a legal proceeding and believes it can offer expertise that could be valuable in prevailing in a court case, such as the one filed by Grayscale.

The attitude that the body chaired by Gary Gensler has been taking toward the cryptocurrency world has long been considered borderline persecutory, considering the dozens of lawsuits filed in various capacities against companies in the sector, and especially the two-year-long lawsuit against Ripple.

The Grayscale Bitcoin Trust

Grayscale is the leading investment vehicle in the crypto world. Its main fund, the Grayscale Bitcoin Trust, administers about $2 billion and allows investors to invest in Bitcoin. But the fund offers the opportunity to invest in dozens of other products, related to cryptocurrencies. Among the products featured is the Grayscale Ethereum Trust, the main investment vehicle on the second most capitalized cryptocurrency.

Since the launch of the main Bitcoin fund, the Grayscale Bitcoin Trust, on 25 September 2013, the gain has been more than 12,000%, although in the past twelve months the fund has lost 69.3%.

The trust holds 643,572 BTC worth more than $12 billion. The Grayscale Bitcoin Trust is publicly listed on the OTCQX, an over-the-counter market under the Alternative Reporting Standard for companies that are not required to register with the Securities and Exchange Commission (SEC). 

It is one of the products that allows institutional investors to invest in the cryptocurrency market, since they cannot invest directly in markets that are not yet regulated, such as the cryptocurrency market.

Cathie Wood invests in Grayscale Bitcoin Trust

One of the main investors in Grayscale Bitcoin Trust is Cathie Wood‘s fund, ARK Investment, which in turn in June last year filed an application with the SEC to launch a Bitcoin ETF.

Wood has always been a supporter of the leading cryptocurrency, and recently at a TV show she said she invested $100,000 in 2015, which she still keeps in her portfolio. This would mean that at current Bitcoin prices would mean a gain of about $7 million.

Ark investment currently owns about 5.9 million shares in the Grayscale Bitcoin Trust worth about $69.7 million. But it cannot be ruled out that this shareholding will soon be revisited to the upside.

Cathie Wood reiterated that in her opinion the trust is severely undervalued, as is Bitcoin itself, on which Wood is strongly bullish. At the same time, she said that the Grayscale Bitcoin Trust may soon be allowed to be converted into a spot exchange-traded fund.

The lawsuit against the SEC

In order to achieve this very goal, after yet another rejection by the SEC, the company decided to take legal action to make its case, as recently stated by the fund’s CEO, Michael Sonnenshein, who argues that this lawsuit does not directly affect Bitcoin.

During a radio program three days ago, Sonnenshein said:

“We really feel that this lawsuit isn’t about bitcoin. This is about putting forward straightforward common sense legal arguments that really ensure that investors are protected and that the SEC is acting within their mandate.”

For its part, the Grayscale Bitcoin Trust filed an initial application with the SEC for a Bitcoin ETF in 2016, but voluntarily withdrew it because it felt the conditions were not yet ideal. The company then reapplied in October 2021 and received a formal rejection from the SEC, in which the regulator justified this decision with concerns that the funds were vulnerable to market manipulation.

Grayscale’s CEO concluded:

“We’ve never seen them do this before for any other product, any other commodity that we’ve ever seen. And it applied it very, very stringently to spot bitcoin ETFs, like GBTC [Grayscale Bitcoin Trust], but very leniently to bitcoin futures ETFs, really acting outside of its authority under the [Securities and] Exchange Act. And that’s really one of the strongest arguments.”