29 Aug, 2023

Grayscale Emerges Victorious Against SEC in the Bitcoin ETF Lawsuit

grayscale win

TL;DR

  • Federal appeals court orders SEC to reevaluate the rejection of Grayscale’s request to turn Bitcoin Trust into an ETF, enabling the 1st US bitcoin ETF.
  • SEC’s denial was termed arbitrary by the court, declaring it unparallel with other approved Bitcoin futures ETFs.

Court Asks SEC To Reconsider Grayscale’s ETF Application

A federal appeals court has issued a ruling that asks the U.S. Securities and Exchange Commission (SEC) to reconsider its rejection of Grayscale’s bid to transform the Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund (ETF).

This historic decision can pave the way for the introduction of a spot bitcoin ETF in the United States. 

This development is believed to make Bitcoin investment more accessible for the public, as direct ownership won’t be necessary. 

Meanwhile, bitcoin jumped just a few hours after the ruling was made. It gained more than 7% increase on a single point on Tuesday.

Bitcoin jumps after Grayscale's legal triumph
Bitcoin jumps after Grayscale’s legal triumph.

SEC’s Inconsistency in Similar Cases Termed Unjust

Neomi Rao, the Circuit Judge, authored the verdict of the court of appeals. She emphasized the rule that similar cases must be dealt with consistently by federal agencies.

The D.C. Circuit ruled in favor of  Grayscale in our lawsuit challenging the SEC’s decision to deny $GBTC’s conversion to an ETF!

Thank you to everyone who has been on this journey with us, especially our investors. We are grateful for your support and encouragement.

Michael Sonnenshein – CEO, Grayscale

The appeals court stated that the SEC’s rejection of Grayscale’s proposal was unsteady. It could not provide a proper explanation for treating Grayscale’s bid differently from other approved bitcoin futures.

Despite the verdict, the court didn’t ask the SEC to approve Grayscale’s application. But the instruction was to review it thoroughly.

The court found that the SEC had failed to justify different treatment of similar products. This discrepancy was termed unlawful.

Circuit Judge’s remarks in Grayscale-SEC lawsuit
Circuit Judge’s remarks in Grayscale-SEC lawsuit.

Path to Bitcoin ETF Widens With This Verdict

Grayscale Investments manages the world’s biggest cryptocurrency fund. On the 21st of October 2021, it submitted an application to convert its GBTC closed-end fund into an ETF. 

However, the SEC rejected the idea due to market manipulation concerns. Grayscale filed an appeal to challenge the decision in the U.S. Court of Appeals for the District of Columbia Circuit.

After the announcement of the Bitcoin spot ETF application, Grayscale’s discount rate fell to around 25%. It was the lowest margin since the start of 2022. 

Market analysts believe that the transformation can nullify this discount, as ETFs tend to trade closer to their fair value.

Grayscale's wins lawsuit against SEC
Grayscale wins lawsuit against SEC.

Grayscale aims to adjust the fund’s structure as a part of this process. The shares will be registered with the SEC under the Securities Act of 1933. The previous private placement approach has been changed, which had limited initial availability.

The shift also incorporates moving the shares to NYSE Arca from over-the-counter markets. It will also allow redemptions, unlike the earlier fund’s setup.

Grayscale has declared that a successful conversion will result in reduced fees. At the same time, the SEC will review the ruling to determine its next steps.