Grayscale’s Opening Brief Against SEC
Digital asset manager Grayscale has officially filed its opening brief in the U.S. Court of Appeals for the District of Columbia Circuit, challenging the U.S. Securities and Exchange Commission’s (SEC) decision to deny its application for converting the Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin exchange-traded fund (ETF). The brief was submitted on October 11, highlighting Grayscale’s stance that the SEC’s rejection was “arbitrary, capricious, and discriminatory.”
Arguments of Discrimination and Regulatory Inconsistency
Grayscale’s legal team asserts that the SEC has applied exceptionally stringent standards to spot Bitcoin exchange-traded products (ETPs) compared to Bitcoin futures ETFs, which have already received approval from the regulatory body. They contend that the SEC’s treatment is inconsistent and violates its statutory authority.
The attorneys further argue that futures ETFs derive their prices from the same underlying markets as spot Bitcoin ETFs, stating that the SEC cannot logically argue that the two product types do not share the same associated risks. They emphasized, “Although Bitcoin may be a relatively new asset, the legal issue here is straightforward… the Commission has violated the APA’s most basic requirements by failing to justify its vastly different treatment of Bitcoin Futures ETPs and spot Bitcoin ETPs.”
Flawed Market Test Critique
Grayscale also objected to the SEC’s “significant-market test,” which aims to assess whether a proposed exchange listing for an ETP is designed to prevent potential fraud and manipulation. The firm characterized the test as “flawed,” arguing that the SEC has set an unattainably high bar that cannot be satisfied and noted that this stringent test is uniquely applied to Bitcoin-related ETPs.
Investor Harm and Lost Value
The brief highlighted the detrimental effects of the SEC’s decision on the investors who hold shares in the GBTC, estimating harm to approximately 850,000 investors. By not allowing the Trust to be traded as an ETP, the share prices are unable to closely track the value of the underlying Bitcoin assets, potentially depriving Trust shareholders of billions in value. Grayscale asserted, “There is simply no justification for continuing to inflict such serious investor harm.”
Timeline for Legal Proceedings
This legal action follows the SEC’s official rejection of Grayscale’sETF conversion application on June 29, 2022. On the same day, Grayscale filed a Petition for Review, initiating this litigation. According to the current timeline, the SEC is required to submit its brief by November 9, with Grayscale expected to follow up with a reply brief on November 30, before both parties present their final briefs on December 21.
Grayscale’s Market Position
As of March 2022, Grayscale managed approximately $26.4 billion in assets, reflecting its leading role in the digital asset management space. The outcome of this litigation could significantly affect not only Grayscale’s operations but also set a precedent for the approval of future spot Bitcoin ETFs in the United States.
Conclusion
Grayscale’s challenge against the SEC signifies a pivotal moment in the evolving landscape of cryptocurrency regulation and investment products. The legal outcomes may provide much-needed clarity and guidance for the future of Bitcoin ETFs and their place within the financial markets.
