SEC Rejects Application to Convert Grayscale Bitcoin Trust (GBTC) Into Spot ETF


By Frank Corva

Many investors who hold shares of Grayscale’s Bitcoin Trust (GBTC) waited with bated breath this past week to see if the SEC would accept Grayscale’s application to convert the trust into the first spot Bitcoin ETF in the U.S.

Let me rewind for a moment to provide some context before I continue, though. 

Grayscale Investments is the largest digital asset manager in the world. It brought GBTC to market in 2015 with the intention of eventually converting it into a spot ETF.

This past year, Grayscale pushed hard for the SEC to approve its application to convert GBTC into a spot Bitcoin ETF, which is an ETF that is backed by actual Bitcoin (BTC).

And we’re back.

Leading up to the SEC’s decision last week, the firm launched a massive advertising campaign around the Washington, DC area. It also prompted GBTC investors to write to the SEC ahead of the regulatory agency’s decision.

However, on June 29, 2022, the SEC rejected Grayscale’s application.

So, while you can get exposure to a number of Bitcoin ETFs around the world, you still can’t invest in a spot Bitcoin ETF in the United States.

Why converting GBTC into a spot Bitcoin ETF is important

GBTC has traded at a discount to net asset value (NAV) since February 2021. That discount is now over 30%.

If the SEC decided to allow for the conversion of GBTC into a spot ETF, that discount would have disappeared, unlocking approximately $8 billion in value for investors.

Plus, a spot Bitcoin ETF likely would have attracted trillions of dollars to both the newfound ETF and its underlying asset, BTC.

It also would have provided investors who are looking for exposure to BTC without having to self-custody the asset with a safer, less anxiety-provoking way of doing so.

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In the wake of the SEC rejecting the conversion of GBTC into a spot ETF, investors who continue to hold GBTC must continue to do so with the nagging worry that its discount can deepen further. 

If the SEC is supposed to protect investors, why wouldn’t it opt to reduce investor anxiety by approving Grayscale’s application to convert GBTC into a spot ETF, a financial product that more precisely tracks the price of the underlying asset?

Why did the SEC reject the application?

The SEC claimed that Grayscale’s ETF proposal failed to prove that it would adhere to “the rules that a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest.’” 

What exactly this statement means is unclear, and the SEC declined to comment further. 

Many investors are confused, as the SEC approved the Proshares Bitcoin Strategy ETF (BITO) in October 2021 to provide investors with access to Bitcoin futures contracts as a means to long Bitcoin. In June 2022, the agency also approved the Proshares Short Bitcoin Strategy ETF (BITI), which provides investors with a means to short Bitcoin.

It seems odd that the SEC feels that approving derivative products — or paper contracts — on Bitcoin was more important than approving a spot ETF for the asset.

Paper weight

The BITO ETF contributed to BTC’s price not exceeding all-time highs this past year. 

Instead of buying BTC, many investors traded this Bitcoin derivative product, which serves as a way to bet on Bitcoin’s price direction.

Bitcoin derivative products are only used for hedging and for speculative purposes, not as long-term investments.

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Caitlin Long, a finance industry vet and CEO of Custodia Bank — a chartered bank that custodies digital assets — stated that paper versions of assets create “fake supply that satisfies real demand, and that (all else equal) this causes an asset’s price to fall.” 

In other words, because the SEC-approved paper Bitcoin products fill a demand for BTC but aren’t backed by the actual asset, they weigh down BTC’s price. 

The SEC’s approval of the BITO and BITI ETFs may provide Grayscale with ammunition to fight back against the agency, though.

Grayscale fights back

Upon receiving the news that its application was denied, Grayscale initiated a lawsuit against the SEC. 

Attorney Donald Verrilli from Munger, Tolles & Olson — the firm representing Grayscale in the lawsuit — has stated that the SEC violated federal law by “failing to apply consistent treatment to similar investment vehicles.”

Those similar investment vehicles are the BITO and BITI ETFs.

Grayscale’s CEO, Michael Sonnenshein, added that Grayscale has every right to sue the SEC in that it acted in an “arbitrary and capricious” manner when it rejected Grayscale’s application to convert GBTC into a spot ETF.

Sonnenshein also shared that the case against the SEC may take nine to 12 months, but that Grayscale “hold[s] strong in our common sense arguments around the ETF conversion.”

I guess us investors will have to see how much longer we can hold our breath as we sink further and further underwater thanks to GBTC’s discount to NAV.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





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