Crypto asset manager Grayscale has been fighting with the US Securities and Exchange Commission (SEC) for some time now over the approval of a spot-based Bitcoin ETF. The case is now before the courts and is putting the crypto-skeptical regulator in a difficult position.
The battle between Grayscale and the SEC is fully underway. Last summer, the SEC rejected the application of Grayscale Investment LLC to convert its flagship Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund (ETF), stating that the proposal did not meet anti-fraud and investor protection standards. Grayscale vehemently denied these accusations and took the matter to court. After all, the SEC had approved a futures-based ETF despite the same concerns. There is a lot at stake for both parties.
Offense as defense for Grayscale
Grayscale Investments is a leading digital currency asset manager that offers investors exposure to cryptocurrencies such as Bitcoin and Ethereum through its trusts. Prior to the introduction of various investment vehicles such as ETFs and ETPs, professional investors could easily participate in the cryptocurrency market through Grayscale's products without having to directly buy and manage the underlying assets. However, due to the current structure of the trust, a discount to the net asset value (NAV) has emerged - a thorn in the side of shareholders.
To avoid having to completely liquidate their most profitable product, the asset manager has been seeking to convert the trust into an ETF for several years. However, the SEC quickly rejected Grayscale's application, fearing that investors would not be adequately protected from market manipulation. With the lawsuit filed less than a year ago, it is now up to the U.S. Court of Appeals for the District of Columbia Circuit to review the SEC's order.
SEC in a tight spot
This week, a panel of judges has questioned the SEC's decision, arguing that the regulatory agency had previously approved certain surveillance agreements to prevent fraud in Bitcoin futures-based ETFs. These agreements should also be satisfactory for Grayscale's spot fund, as both spot and futures funds rely on the price of Bitcoin.
"It seems to me that the Commission [SEC] really needs to explain how it understands the relationship between bitcoin futures and the bitcoin spot price. It seems to me that one is essentially a derivative. They move together 99.9% of the time. So where is the gap, according to the Commission?" - Judge Neomi Rao
Grayscale's strong showing in court has led Bloomberg analysts to change their views on the outcome of the legal dispute, with specialists now predicting a 70% chance of victory against the regulatory agency.
What's at stake in the lawsuit?
The regulatory environment for cryptocurrency companies in the United States has dramatically tightened in recent months. A victory in court for the SEC would be a major success in their ongoing efforts to bring the cryptocurrency market under their purview. So far, the SEC has not lost any of the dozens of legal disputes against cryptocurrency companies. However, a defeat would set a precedent for further plaintiffs dissatisfied with the regulatory agency's recent rulings.
Grayscale's CEO, Michael Sonnenshein, expects a final decision in the fall and believes that the court will rule in favor of Grayscale. In January, he told Reuters that Grayscale would appeal if the court ruled in favor of the SEC.
Grayscale CEO Michael Sonnenshein says his firm is using all its resources in its legal fight with the SEC to convert its Bitcoin to an ETF pic.twitter.com/0CjVunEDCB
— Bloomberg TV (@BloombergTV) March 8, 2023