Grayscale Suing SEC After Spot Bitcoin ETF Rejection

On June 29, the Securities Exchange Commission (SEC) rejected an application from Grayscale Investments to change its Grayscale Bitcoin Trust (GBTC) to an ETF. It was an effort that Grayscale has been publicly pushing since April 2021.

Now Grayscale has said that it is suing.

In its ruling, the SEC stated that the Grayscale spot ETF application did not do enough to prevent possible fraud and protect investors from “fraudulent and manipulative acts and practices.”

After the SEC made the announcement public, Grayscale CEO Michael Sonnenshein quickly went on Twitter to announce the legal action decision.

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

— Sonnenshein (@Sonnenshein) June 30, 2022

According to Grayscale, the firm is filing a petition for review with the United States Court of Appeals for the District of Columbia aiming to challenge the decision to deny the changing of Grayscale Bitcoin Trust to a spot Bitcoin ETF.

Sonnenshein stated in a press release:

“We are deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market.”

Sonnenshein Has A Legal Team Ready

Sonnenshein then went on to state that Grayscale would continue leveraging all its resources to support its investors and the “equitable regulatory treatment of Bitcoin investment vehicles.”

Earlier in June, in preparation for the SEC decision, Grayscale had said that it had hired legal counsel, including Donald B. Verrilli, Jr., former Solicitor General of the US, and law firm Davis Polk & Wardwell.

As we enter the final month before a response is due on our application to convert $GBTC to an ETF, we have retained Donald B. Verrilli, Jr., former Solicitor General of the United States, as additional legal counsel. A short 🧵 on why:

— Grayscale (@Grayscale) June 7, 2022

Verrilli said in Grayscale’s press release while responding to the SEC rejection:

“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.”

Grayscale, launched in 2013, is a subsidiary of Barry Silbert’s Digital Currency Group. The firm offers market information, investment products, and the exposure to digital assets. Since it was launched, Grayscale has filed many applications for Bitcoin ETFs.

In an official notice to the SEC in October 2021, Grayscale wrote about its approval journey:

“Grayscale first submitted an application for a Bitcoin ETF in 2016 and spent the better part of 2017 in conversations with the SEC. Ultimately, we withdrew our application because we believed the regulatory environment for digital assets had not advanced to the point where such a product could successfully be brought to market.”

After this decision, it seems the SEC thinks the crypto environment is not ready.

What Is An ETF And Why Is Grayscale Looking For One?

An exchange-traded fund (ETF) bundles securities like commodities and stocks, enabling investors to acquire shares on the public market without directly owning the assets; in this case, Bitcoin. In October 2021, the SEC eventually let a Bitcoin futures ETF, which provides derivative contracts that speculate on the future price of Bitcoin (BTC).

It is yet to allow a Bitcoin spot ETF that would be linked to Bitcoin’s current price. According to Grayscale, the Grayscale Bitcoin Trust now has $12.9 billion under management. Shares in the GBTC have traded at considerably less than the net value of the Bitcoin held by Grayscale since February last year.

By altering the trust to become a spot Bitcoin ETF, Grayscale hopes to correct Grayscale Bitcoin Trust’s “discount” and enable the investment company to charge lower fees, making it quite easy to move money in and out of the fund.

In April 2022, Grayscale introduced a broad marketing campaign urging the public to advocate for a Bitcoin ETF to the Securities Exchange Commission. The campaign ran in multiple media outlets, including The Wall Street Journal, New York Times, and Washington Post.

Based on the release from Grayscale, the comment campaign attracted 11,400 total submissions to the SEC. the latest ruling comes just a week before the deadline for comments and is now the latest setback for Grayscale which has had every ETF application rejected by the SEC since the company first started applying in early 2017.