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Grayscale Bitcoin Trust Inches Closer to ETF Conversion, Judges Express Skepticism towards SEC’s Arguments

Grayscale Investments, the world’s largest Bitcoin trust with a valuation of $14 billion, has been attempting to convert its flagship product into an exchange-traded fund (ETF) for years. 

A Small Victory For Grayscale

Despite its efforts, the Securities and Exchange Commission (SEC) has consistently denied its application. However, during the recent oral arguments held on Tuesday, a trio of appellate judges from the U.S. Court of Appeals for the District of Columbia Circuit hinted that Grayscale’s quest might finally bear fruit.

The judges were consistently skeptical of the SEC’s arguments justifying its decision to disallow the conversion of the Grayscale Bitcoin Trust into an ETF. This case revolves around whether the SEC acted arbitrarily by denying applications for ETFs that hold Bitcoin directly. That is despite approving ETFs that hold Bitcoin futures like ProShares Bitcoin Strategy (BITO).

Grayscale’s trust, traded under the ticker GBTC, soared after the oral arguments finished. Prices rose by 13% even as Bitcoin prices remained relatively unchanged.

The SEC has rejected Bitcoin ETF applications from Grayscale and other companies for years. In every case, it cites inadequate surveillance capabilities of the platforms where Bitcoin tokens trade to detect fraud and manipulation. 

Has The SEC Slipped Up?

The SEC approved funds that hold Bitcoin futures, which trade in regulated commodities markets. Grayscale argues that there is no significant difference between the futures and spot markets since the spot price drives the futures market.

Donald Verrilli, a former solicitor general in the Obama administration who represented Grayscale, said that spot Bitcoin and Bitcoin futures funds “pose the same risk of fraud and manipulation.”

The case has broad implications for the crypto market, not just GBTC. Currently, GBTC trades like a closed-end fund. Therefore, its prices can deviate significantly from that of the underlying Bitcoin. For example, the fund traded at a 42% discount on Monday. However, if the fund were to become an ETF, causing the discount to close, investors could accrue about $5.9 billion in value.

The Court Battle Continues

During Tuesday’s oral argument, judges pressed the SEC on the distinction between the spot and futures markets. They also asked what data the agency wanted Grayscale to provide to prove that surveillance of the futures market was a good proxy for surveilling that of spot Bitcoin.

Judge Neomi Rao, while questioning the SEC, said:

“In approving the futures ETPs, it seems to be that the commission has to have necessarily drawn the conclusion that this arrangement would prevent fraud and manipulation on the underlying spot market because they recognize the relationship between the two markets and they approved the rule for the futures product.”

SEC attorney Emily True Parise said the agency needed to see additional data on whether fraud and manipulation in the futures market affect the spot market “in the same way” before agreeing that the futures market surveillance was sufficient.

After the oral arguments, the court could decide this summer. However, Grayscale executives believe a ruling is likely in the fall. 

Success Isn’t Guaranteed By Any Means

Even if Grayscale wins the case, the judges noted that the SEC could still reject Grayscale’s application on some other basis. Additionally, it can revisit its decision to approve Bitcoin futures funds.

Investors hoping for GBTC’s ETF conversion should be cautious because judges’ tones during arguments often do not indicate how they will ultimately rule. 

Additionally, even if Grayscale wins the case, the SEC could still reject its application on some other basis.