Lawyers for Grayscale Investments will appear in court on Tuesday to argue that federal regulators improperly refused to clear its conversion of the $14 billion Grayscale Bitcoin Trust (GBTC), raising the stakes for one of the last asset categories left untouched by ETFs.
Grayscale sued the U.S. Securities and Exchange Commission last June after the agency summarily denied its bid to convert GBTC into an ETF, arguing that regulators were arbitrarily refusing to allow ETFs that directly hold cryptocurrency to launch while allowing other ETFs that hold futures contracts on cryptocurrencies onto the markets. The firm hired former U.S. Solicitor General Donald Verrilli to lead the appeal to the U.S. Court of Appeals for the D.C. Circuit.
In its response, the SEC said that cryptocurrency futures are a completely different asset than spot cryptocurrency and should be treated differently because the futures market in the U.S. is overseen by the Commodity Futures Trading Commission.
The SEC has refused to allow spot cryptocurrencies to underlie ETFs for more than a decade due to concerns about the lack of regulation over the space. In particular, regulators have said that the absence of a formal surveillance agreement among cryptocurrency exchanges opens cryptocurrencies to fraud and price manipulation.
What’s at Stake
If Grayscale succeeds, ETF issuers would be free to issue funds that directly hold bitcoin, ethereum, and other widely traded cryptocurrencies after years of regulatory roadblocks. It would also signal a defeat for SEC Chairman Gary Gensler, who has long advocated for expanding regulatory powers over crypto exchanges as part of a larger consumer protection effort in the Biden Administration.
Grayscale also stands to solve GBTC’s persistent discount to its net asset value. If it were converted to an ETF, GBTC could more often create and redeem shares to keep in line with the volatile price of bitcoin compared to its current status as a closed-end fund. GBTC was trading at a 44.5% discount to its net asset value at the end of trading Friday and has traded at a discount since February 2021.
Where to Listen
The Court of Appeals for the D.C. Circuit will livestream oral arguments beginning at 9:30 AM Eastern Time on March 7. The arguments for Grayscale v. SEC will likely begin around 10 AM, with each side taking 15 minutes to present.
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