Grayscale: SEC’s argument for blocking Bitcoin ETF is “illogical”

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In the fifth round of the legal battle between the SEC and crypto investment firm Grayscale, the latter criticized the Commission’s previous brief, saying that “the regulator’s central premise is illogical.”

Today’s response brief responds to the SEC’s Dec. 9 brief and is part of ongoing litigation initiated by Grayscale in June 2022. The litigation began after the SEC rejected the company’s attempts to convert its Grayscale Bitcoin Trust (GBTC) into a coveted spot market Bitcoin ETF.

The watchdog argued that the ETF app isn’t doing enough to protect investors from “fraudulent and manipulative acts and practices,” an argument that has surfaced in almost every Bitcoin ETF rejection from the market. DRY.

Yet, the Commission has already approved several Bitcoin ETFs based on futures contracts, suggesting that this product is not prey to the same frauds and manipulations because “the two products are not the same”.

“Its central premise that the exchange monitoring sharing agreement with the CME provides adequate protection against fraud and manipulation in the bitcoin futures market, but not in the bitcoin spot market, is illogical,” Grayscale explained in today’s answer.

A surveillance sharing agreement refers to an agreement between an exchange and the Chicago Mercantile Exchange (CME), in which the CME supervises all instances of market manipulation that would artificially affect the price of an asset.

Grayscale’s response countered that any fraud occurring in the Bitcoin spot market would “necessarily affect the price of Bitcoin futures.”

“There is therefore no reasonable basis for concluding that CME oversight adequately protects holders of any type of ETP [Exchange-Traded Product] but not the other,” the response continues. “Yet the Order rests on that same conclusion.”

The SEC will release its final brief on the matter on February 3.

Converting Bitcoin ETF to Grayscale

Although the market has been waiting for a spot Bitcoin ETF for several years, with Grayscale’s litigation also gaining support from many in the industry, the asset manager’s struggling GBTC product has added pressure to get its conversion approved.

GBTC allows investors to gain exposure to Bitcoin without needing to own the asset itself. Lately, however, the Grayscale product is trading at a steep discount to the underlying BTC it hopes to represent. According to Ycharts, the discount is currently at 39.68% but has bottomed out at 48.89%.

This discount arose due to recent market volatility as well as the inability to redeem GBTC shares for actual Bitcoin. If the product was converted to a traditional ETF, this redemption process would be available and would likely clear the discount as arbitrageurs traded the difference.

The firm is also facing pressure from investors for this discount. In December, hedge fund Fir Tree Capital filed a lawsuit against Grayscale for “potential mismanagement and conflicts of interest” related to the growing gap between GBTC and Bitcoin.

And while Grayscale is taking on the SEC, its CEO Michael Sonnenshein has also floated some ideas on how to handle the discount if the Commission wins the case. One such idea is to make a tender offer for 20% of the outstanding shares.

That too, however, would also require SEC approval to waive “certain requirements” for the execution of such an offer.

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