Interpretation: Although grayscale won the lawsuit, the SEC can still refuse to approve the BTC ETF

Written by: jk, OdailyNews

Last night, the U.S. Court of Appeals for the District of Columbia Circuit ordered the U.S. Securities and Exchange Commission (SEC) to reconsider its decision to deny Grayscale Investments' application to convert its Bitcoin Trust (GBTC) into an exchange-traded fund (ETF). This decision is seen by the industry as a potential sign that ETFs may be opened up, indicating that the first spot Bitcoin ETF could emerge in the U.S. in the future.

Timeline Overview:

1. In 2021, Grayscale applied to convert its GBTC trust into an ETF;
2. The SEC subsequently rejected Grayscale's application, citing reasons such as its "failure to prevent market manipulation";
3. Grayscale then appealed to the appellate court, arguing that the SEC's actions may violate the U.S. Administrative Procedure Act, as the SEC had approved Bitcoin futures ETFs before making this decision, and there is no essential difference in risk between futures ETFs and Grayscale's product;
4. On August 29, 2023, the court ruled in favor of Grayscale, ordering the SEC to reconsider Grayscale's application.

Odaily Planet Daily would like to remind that Grayscale's argument for the lawsuit is, "Since the SEC has already approved other Bitcoin futures ETFs, and the Grayscale spot ETF has the same risks and potential for market manipulation as futures ETFs, the SEC cannot use this reason to deny my application." This is a judgment about procedural justice, rather than outcome justice.

Therefore, after the judge ruled in favor, it only required the SEC to "reconsider." This ruling does not require the SEC to directly approve Grayscale's application, meaning that legally, the SEC can still refuse Grayscale's application based on a different reason related to spot ETFs if it truly decides to do so.

Background and Controversy

The case began in October 2021 when Grayscale Investments first applied to convert its closed-end fund GBTC into an ETF. However, the SEC rejected this application, stating that it failed to address the SEC's concerns regarding preventing market manipulation. Notably, the SEC has approved several ETFs related to Bitcoin futures but has taken a reserved stance on spot Bitcoin ETFs, which has sparked widespread questioning and discussion within the industry.

Reports indicate that at that time, two ETPs had already been approved.

Grayscale expressed dissatisfaction and filed an appeal within an hour of the SEC's rejection decision. Grayscale requested the D.C. Circuit Court of Appeals to review the SEC's decision, claiming that the SEC's actions may violate the U.S. Administrative Procedure Act (APA).

Impact of the Court's Decision

Following Grayscale's victory, it immediately sparked heated discussions in the industry. This could not only open doors for Grayscale itself but also pave the way for other financial institutions like BlackRock and Fidelity to apply for spot Bitcoin ETFs. If the SEC cannot refuse Grayscale's application based on market manipulation or find other reasons, it will need to approve Grayscale and all other spot Bitcoin ETFs.

Another impact is that analysts have long believed that converting from a closed-end fund to an ETF could completely eliminate the discount of GBTC, as ETFs allow for redemptions, which typically trade close to their fair value. With Grayscale's new structure transitioning from a trust to an ETF, it means that investors or authorized participants will now be able to trade directly with the fund, rather than just trading on the secondary market. This generally helps to reduce the deviation between the fund's price and its net asset value, allowing investors to buy and sell at prices closer to the fund's net asset value. This change is beneficial for investors as it provides a more flexible and efficient trading mechanism. Consequently, this decision could attract a significant amount of institutional capital, as the current discounted Bitcoin may represent a good investment opportunity.

In addition to potentially eliminating the GBTC discount, this change also means that the fund will operate in a more formal and regulated environment. The change in fund structure will require its shares to be registered under the SEC according to the Securities Act of 1933, upgrading from the over-the-counter market to the NYSE Arca.

Such changes may attract a broader range of investors, including those who prefer to invest in products that are subject to stricter regulation. This could also make the investment tool more liquid and accessible.

Next Steps

However, it remains unclear how the SEC will implement this court order and what its final decision will be. Adam Cochran, a partner at Cinneamhain Ventures, stated that the SEC has three options regarding the court ruling: delay the decision and propose new reasons for rejection; acknowledge and approve (Grayscale ETF); or request an en banc appeal of the case (full bench appeal). Key issues regarding market manipulation, investor protection, and regulatory oversight still need to be addressed.

Nevertheless, it is undeniable that this court decision could become an important turning point in cryptocurrency regulation and the availability of U.S. crypto investment products. This event also raises critical questions about how regulators should handle new financial instruments based on emerging technologies. Overall, this development will be closely monitored, as it could not only impact Grayscale Investments and GBTC but also have far-reaching effects on the entire U.S. cryptocurrency market and related financial products.