Grayscale Wins Appeal Against SEC to Convert GBTC to an ETF

The U.S. Court of Appeals for the D.C. Circuit, in a decision on Tuesday, directed the Securities and Exchange Commission (SEC) to reexamine its rejection of Grayscale’s application for a spot Bitcoin ETF. This decision is seen as a pivotal moment for the cryptocurrency sector, given the SEC’s consistent denial of spot Bitcoin ETF applications over the last decade, primarily over concerns of market manipulation.

Grayscale Investments, a crypto asset manager, has won a significant legal battle against the SEC. Their primary objective is to transform their over-the-counter Grayscale Bitcoin Trust (GBTC) into a Bitcoin exchange-traded fund (ETF) available on stock exchanges. The SEC previously turned down the GBTC application, citing the product’s inability to “prevent fraudulent and manipulative acts and practices.” Following the rejection, Grayscale took legal action, and the verdict has now been overturned.

Circuit Judge Neomi Rao, in the court documents from August 29, mandated a review of Grayscale’s application and nullified the SEC’s previous denial. Judge Rao highlighted that the SEC failed to provide a rationale as to why Grayscale’s application was unjustified. However, the court’s order doesn’t ensure the eventual listing of Grayscale’s Bitcoin ETF.

The court expressed its concern over the SEC’s inconsistent decisions, questioning why the Commission approved the listing of two bitcoin futures ETPs but turned down Grayscale’s proposal without providing a clear justification. Such inconsistent regulatory actions for similar products were deemed “unlawful” by the court.

Michael Sonnenshein, Grayscale’s CEO, mentioned on X (previously known as Twitter) that the company’s legal team is currently examining the court’s verdict.

A recap: the SEC rejected Grayscale’s proposal to transition GBTC into a spot ETF on June 29, 2022. The following day, Grayscale’s top legal advisor, the former U.S. Solicitor General Donald B. Verrilli Jr., sought a review from the United States Court of Appeals for the District of Columbia Circuit. Sonnenshein, at that juncture, vocalized the firm’s strong disagreement with the SEC’s decision.

Notably, Grayscale Bitcoin Trust, boasting over $14 billion in managed assets, is the dominant Bitcoin fund available over-the-counter. Shares of GBTC earlier this year saw a nearly 50% discount to its net asset value, influenced by the ongoing legal skirmishes with the SEC and concerns related to its parent company, Digital Currency Group (DCG).

A spot Bitcoin ETF, viewed in cryptocurrency circles as a catalyst for widespread institutional acceptance, would provide investors access to Bitcoin on standard stock exchanges, essentially allowing them to possess the coin within a brokerage account.

Both Grayscale and the SEC have a 45-day window to contest the recent court ruling. Depending on any potential appeal, the case might escalate to the U.S. Supreme Court or be subject to a full-court review, involving all of the court’s judges during a rehearing.