On August 29, 2023, the Court of Appeals for the DC Circuit delivered a groundbreaking decision, unanimously overturning the Securities and Exchange Commission’s (SEC) June 2022 denial of Grayscale Bitcoin Trust’s (GBTC) conversion to a spot bitcoin Exchange-Traded Fund (ETF).
This pivotal ruling has not only invigorated GBTC shareholders but has also sent ripples through the Bitcoin, cryptocurrency, and broader investment communities.
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Legal Maneuvers and Implications
Post-review of the Court’s Opinion, Grayscale’s legal team, in collaboration with Davis Polk & Wardwell and Munger Tolles & Olsen, submitted a comprehensive letter to the SEC. The letter highlighted key points that questioned the SEC’s prolonged hesitance in approving spot bitcoin ETFs, especially when compared to bitcoin futures ETFs.
The letter emphasized that if there were any substantial reasons to differentiate between spot and futures-based bitcoin ETFs—particularly concerning the Exchange Act’s mandate to prevent fraudulent activities—such reasons would have emerged during the SEC’s rejection of 15 prior spot bitcoin Rule 19b-4 filings.
Grayscale’s legal team pointed out that the SEC’s review of GBTC’s Rule 19b-4 filing has far exceeded the time limits set by Section 19(b) of the Exchange Act. They urged the SEC to expedite the approval process, stating, “We believe the Trust’s nearly one million investors deserve this fair playing field as quickly as possible.”
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Show more +The Plea for Expedited Approval
In a detailed plea letter, Grayscale’s legal team outlined three critical points for the SEC to consider:
- Investor Impact: Each day of delay harms GBTC’s existing investors, as the shares continue to trade at a significant discount to the net asset value. The Court’s decision alone tightened this discount by over 600 basis points, restoring more than $2 billion in value to investors.
- Market Efficiency: U.S. investors are currently forced into less efficient investment structures due to the absence of approved spot-based bitcoin ETFs. This puts spot bitcoin product issuers like Grayscale at a competitive disadvantage.
- Emerging Competition: The SEC has recently received multiple Rule 19b-4 filings for proposed spot bitcoin ETFs, indicating a growing market demand that the Commission cannot ignore.
The SEC finds itself at a crossroads. On one hand, it has the Court of Appeals’ decision and Grayscale’s compelling arguments pushing for swift action. On the other hand, it has its own reservations and the regulatory complexities surrounding cryptocurrencies.
As Grayscale and its investors eagerly await the SEC’s next move, one question looms large: How much longer can the SEC afford to delay the inevitable in a rapidly evolving financial landscape? With the Court of Appeals setting a legal precedent, the ball is now firmly in the SEC’s court. The agency must decide whether to continue its cautious approach or to finally give the green light to spot bitcoin ETFs, leveling the playing field for all.
The SEC’s next steps are highly anticipated, not just by Grayscale and its investors, but by the entire financial community. The Court of Appeals’ decision has set a legal precedent that puts significant pressure on the SEC to act.
However, the SEC has historically been cautious when it comes to groundbreaking financial instruments, particularly those involving cryptocurrencies. The agency may opt for further delays, citing the need for additional review and public commentary, or perhaps waiting for a more favorable regulatory environment.
That said, the mounting pressure from legal entities, the investment community, and now the judicial system makes it increasingly difficult for the SEC to justify further delays. The agency is at a pivotal juncture where it must balance investor protection with market demand for innovation.
In light of these factors, while it’s speculative, the odds seem to be tipping in favor of a sooner rather than later approval of a Bitcoin ETF. The SEC may find it increasingly challenging to back away from making a decision, especially when the Court of Appeals and market forces are pushing for progress.
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