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Grayscale Wins Lawsuit, What Will the SEC Do Next?

Bitpush

2023-08-30 01:49

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What's next? Much depends on whether SEC Chair Gary Gensler is willing to throw in the towel or fight to the end.

Source: Bitpush News

On August 29 local time, Grayscale Investments won a crucial lawsuit against the U.S. Securities and Exchange Commission (SEC). A Washington D.C. Circuit Court judge ruled in the decision that while the SEC's approval of a Bitcoin futures ETF was valid, the decision to deny Grayscale's conversion of GBTC to a spot Bitcoin ETF was "arbitrary and capricious" .

灰度赢得诉讼，SEC接受败局还是战斗到底？

This decision has injected significant momentum into Grayscale's years-long effort, with the company stating in a release that the decision was "a milestone step forward for U.S. investors" .

The new ruling marks the SEC's second recent loss in court regarding crypto positions, and a severe rebuke to SEC Chair Gary Gensler's crackdown on the crypto industry. Bitpush previously reported that the SEC had objected to a federal judge's preliminary ruling on Ripple, which found that Ripple Labs' XRP token was not a security when sold to the public.

The market reacted strongly to this news. The Grayscale Bitcoin Trust (GBTC) surged nearly 17% in secondary trading today to $20.56, with assets under management rising from $16.2 billion the day before to $17.4 billion. Bitcoin itself saw an intraday increase of up to 8.3%, reaching $27,600 at the time of writing.

"Arbitrary and Capricious"

Bitpush previously reported that the SEC had rejected Grayscale's conversion proposal in 2022, arguing that a Bitcoin-based ETF lacked sufficient oversight for detecting fraudulent activities. Grayscale filed a lawsuit to overturn the SEC's discriminatory decision against its product, while simultaneously approving a similar Bitcoin futures ETF.

The core of Grayscale's lawsuit focused on whether a fund manager can offer a spot Bitcoin ETF that allows retail investors to track Bitcoin's real-time price. While the SEC had previously greenlit Bitcoin futures-based ETFs, the regulatory body believed that Bitcoin trading on unregulated exchanges was susceptible to market manipulation.

Judge Neomi Rao wrote in the ruling: "The rejection of Grayscale's proposal was arbitrary and capricious because the Commission failed to explain its differential treatment of similar products" .

The court stated in its opinion that Grayscale "provided substantive evidence" demonstrating that its product is similar to an SEC-approved Bitcoin futures ETF. The underlying assets of both products are closely related, with a regulatory sharing agreement "identical" to that of the Chicago Mercantile Exchange.

During a March court hearing, judges questioned the SEC about their decision and seemed to support Grayscale's argument that the underlying market for spot Bitcoin and Bitcoin futures equally face fraud and manipulation risks.

Key Benefits of a Spot Bitcoin ETF?

Despite the SEC's tough stance on the crypto industry, demand for a spot Bitcoin ETF is still growing. Some of the largest and most well-known companies in finance have recently submitted applications to the SEC to launch Bitcoin ETFs, with institutions like BlackRock, WisdomTree, and Fidelity proposing spot Bitcoin ETFs.

Jeremy Senderowicz of Vedder Price law firm tweeted, "Based on the court's ruling, this is almost a fatal blow to the SEC's rationale for disallowing these products from trading. If upheld, it would undo the core rationale behind the SEC's rejections of all spot Bitcoin ETFs in recent years."

This could be a turning point for Bitcoin adoption. Supporters believe that a Bitcoin spot ETF would drive significant retail participation.

Grayscale stated that converting to an ETF would help it more easily create and redeem shares, allowing its $16.2 billion trust fund to release billions of dollars' worth of value to investors. The trust's closed-end structure does not permit investors to redeem shares when prices drop, leading to its trading at a significant discount to underlying Bitcoin. As an ETF, it can create and redeem shares to meet evolving demand.

Owen Lau, an analyst at Oppenheimer & Co, said in an interview with Bloomberg that this ruling adds momentum to the digital asset industry after the Ripple case: "The market is now filled with great optimism."

James Seyffart, an analyst at Bloomberg Intelligence, noted that while the possibility of GBTC converting to an ETF has increased, "it's not 100%."

In a tweet, Seyffart stated, "What we know is with a Bitcoin futures ETF existing, the SEC cannot use the fraud and manipulation arguments they used in prior disapprovals to reject a spot ETF."

Seyffart noted that the SEC could consider delisting the current Bitcoin futures ETF but believed it was "unlikely." He said: "It depends on Gary Gensler's leadership and the SEC's belief that a Bitcoin ETF should not exist. For them, continuing to deny becomes more challenging, but not impossible."

What Is the SEC's Next Move?

What's next? It largely depends on whether SEC Chair Gary Gensler wants to give up or fight on.

Arie Heijkoop, a partner at Haynes Boone, said he expects the SEC not to appeal.

In a personal tweet, Heijkoop stated: "The court provided a powerful critique of the SEC's decision, so it's unlikely to be overturned. If the SEC is still unwilling to approve a spot Bitcoin [product], this decision does indeed leave room for the SEC to review its denial of Grayscale and clarify other reasons for rejection." Matt Hougan, Chief Investment Officer at Bitwise Asset Management, analyzed that based on the appeal decision, the SEC will face several options next.

One option is to promptly approve some or all of the 9 pending spot Bitcoin ETF applications. The SEC may agree with the court's ruling and issue an order allowing the exchange (NYSE Arca) where the Grayscale ETF is listed to continue trading the Grayscale fund or approve other applied-for funds.

Bitcoin spot ETF applications currently in the queue include: Grayscale Bitcoin Trust; Ark/21 Shares Bitcoin Trust; Bitwise Bitcoin ETF Trust; BlackRock Bitcoin ETF Trust; VanEck Bitcoin Trust; WisdomTree Bitcoin Trust; Valkyrie Bitcoin Fund; Invesco Galaxy Bitcoin ETF; Fidelity Wise Origin Bitcoin Trust.

Second is a delay, if permitted by law. The first applicant to submit is Ark, with the application published in the Federal Register on May 15. The SEC has up to 240 days to approve or deny these applications, meaning the first deadline is January 10, 2024.

The third option is to present new reasons for disapproval and face the possibility of Grayscale filing suit again. The SEC can no longer use the argument that the market is not of sufficient size to prevent manipulation, but it may raise other arguments.

Bloomberg analyst Seyffart summarized in his tweet that it is currently unknown whether the SEC will make a new decision in the coming weeks or months, or request Grayscale to file a 19b-4 form (used to notify regulators of proposed rule changes). He emphasized that the SEC may find a reason not previously used to reject the conversion of GBTC to an ETF, such as potential opposition arguments related to Bitcoin custody.

An SEC spokesperson stated that they are reviewing the court's ruling, with 45 days to request an en banc review by the D.C. Circuit, and, if the appellate court declines to hear the case, the SEC will have 90 days to petition the U.S. Supreme Court.