SEC Denies Grayscale's Request To Transform GBTC Into A Bitcoin ETF

The U.S. Securities and Exchange Commission on Wednesday rejected Grayscale Investments LLC’s proposal to turn the largest cryptocurrency trust in the world into an Exchange-Traded Fund (ETF) on the NYSE platform. Grayscale is one of the most prominent global digital asset managers. 

The Securities and Exchange Commission (SEC) stated in a filing that the proposal to list the ETF did not adhere to the standard intended to stop fraudulent and manipulative conduct, protect investors, and serve the public interest. They also said that their disapproval was not based on determining the utility or worth of bitcoin or blockchain technology as an innovation or an investment.

Grayscale initially submitted its application in October of last year, but the SEC repeatedly postponed deciding because of requests for more details and public feedback. The SEC had until July 6 to decide whether to grant Grayscale’s application. Grayscale had put pressure on the watchdog to support it, including by providing a quick email form for people to use to show their support.

This rejection ends Grayscale’s eight-month conversion drive. On June 27, Michael Sonnenshein, the chief executive of Grayscale, said that all alternatives are ready if the SEC rejects the conversion. On the same day, Grayscale also said that if its application were to be granted, it would cooperate with market makers Virtu Financial and Jane Street to assist in turning GBTC into an ETF. 

To be prepared for all possible results, the company hired former U.S. Solicitor General Donald Verrilli in June. Grayscale immediately appealed the SEC’s ruling to the U.S. Court of Appeals in a petition. Verrilli Jr., a former solicitor general of the United States, is Grayscale’s chief legal strategist, and he is leading a group of lawyers from Davis Polk & Wardwell in this case.

By failing to provide uniform treatment to identical investment vehicles, Verrilli alleged that the SEC is behaving arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934. Grayscale claimed that transforming into an ETF will provide up to $8 billion in value for investors at a meeting with U.S. authorities in May. Thousands of letters in favor of conversion have been sent to the SEC since Grayscale started a campaign to get feedback from the public.

The rate of bitcoin, the most famous digital currency, has decreased by around 70% from its peak in November. Therefore, investors are selling riskier assets in response to increasing inflation and major central banks’ tightening policy. Other cryptocurrencies and stocks associated with them have also fallen sharply in recent months. Fidelity, SkyBridge, and Valkyrie were among the companies who attempted to offer simple access to the virtual currency but had their spot bitcoin ETFs denied by the SEC in recent months.

Grayscale takes legal action against the SEC over spot ETF rejection
However, Grayscale is not taking the SEC’s stand lightly and has sued the US SEC after turning down their call for the Spot Bitcoin ETF. Grayscale’s CEO has declared that they will continue to deploy the company’s resources to advocate for their investors. 
“Through the ETF application review process, we believe American investors overwhelmingly voiced a desire to see GBTC convert to a spot Bitcoin ETF, which would unlock billions of dollars of investor capital while bringing the world’s largest Bitcoin fund further into the U.S. regulatory perimeter. We will continue to leverage the full resources of the firm to advocate for our investors and the equitable regulatory treatment of Bitcoin investment vehicles.”

We’ve filed a lawsuit against the SEC. $GBTC

— Sonnenshein (@Sonnenshein) June 30, 2022

Also, Donald B. Verrilli Jr., Grayscale’s senior legal strategist, and former U.S. Solicitor General stated, “The SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934.”

He further added that “There is a compelling, common-sense argument here, and we look forward to resolving this matter productively and expeditiously.”

Moreover, over the past year, the SEC has rejected more than a dozen requests for spot bitcoin ETFs, citing a lack of surveillance-sharing agreements with a substantial regulated market about the underlying asset. Before the rejection, GBTC’s share price was trading at a roughly 29% discount to net asset value, down from a 34% discount one week before. The attention of investors and cryptocurrency experts will now shift to what Grayscale can and will do to secure approval for the conversion.