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

By Frank Corva

Many investors who own shares of Grayscale’s Bitcoin Trust (GBTC) waited anxiously last week to see if the SEC would accept Grayscale’s request to convert the trust into the first Bitcoin ETF in the United States.

Let me back up for a moment to provide some context before continuing, however.

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

Last year, Grayscale lobbied for the SEC to approve its application to convert GBTC to a spot Bitcoin ETF, which is an ETF backed by actual Bitcoin (BTC).

And we are back.

Ahead of the SEC’s decision last week, the company launched a massive advertising campaign in the Washington, DC area. It also prompted GBTC investors to write to the SEC ahead of the regulator’s decision.

However, on June 29, 2022, the SEC denied Grayscale’s request.

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 US.

Why converting GBTC to a spot Bitcoin ETF is important

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

If the SEC decided to allow the conversion of GBTC into a spot ETF, this rebate would have disappeared, releasing approximately $8 billion of value for investors.

Additionally, a spot Bitcoin ETF would likely have attracted trillions of dollars for both the new ETF and its underlying asset, BTC.

It would also have provided investors seeking exposure to BTC without having to hold the asset themselves a safer and less anxiety-inducing way to do so.

Following the SEC’s rejection of GBTC’s conversion to a cash ETF, investors who continue to hold GBTC must continue to do so with the nagging fear that its downgrade could deepen further.

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

Why did the SEC deny the request?

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

The exact meaning of this statement 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 as a means of acquiring Bitcoin. In June 2022, the agency also approved the Proshares Short Bitcoin Strategy ETF (BITI), which offers investors a way to short Bitcoin.

It seems odd that the SEC believed that approving Bitcoin derivatives – or paper contracts – was more important than approving a spot ETF for the asset.

Paper weight

The BITO ETF has helped keep the price of BTC below all-time highs of last year.

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

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

Caitlin Long, financial industry veterinarian and CEO of Custodia Bank – a chartered bank that guards digital assets – declared that paper versions of assets create “a fictional supply that satisfies real demand, and that (all other things being equal) this drives down the price of an asset”.

In other words, because SEC-approved Bitcoin paper products meet a demand for BTC but are not backed by the actual asset, they depress the price of BTC.

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

Greyscale Strikes Back

After learning that its request had been denied, Greyscale filed a lawsuit against the SEC.

Attorney Donald Verrilli of Munger, Tolles & Olson – the firm representing Grayscale in the lawsuit – said the SEC violated federal law by “failing to apply consistent treatment to similar investment vehicles”.

These similar investment vehicles are BITO and BITI ETFs.

Greyscale CEO Michael Sonnenshein added that Grayscale had every right to sue the SEC for acting “arbitrarily and capriciously” when it rejected Grayscale’s request to convert GBTC into an ETF in the UK. cash.

Sonnenshein also shared that the case against the SEC could take nine to 12 months, but that Grayscale “holds[s] backed by our common-sense arguments around the conversion of ETFs.

I guess we investors will have to see how long we can hold our breath as we sink deeper and deeper under the water thanks to GBTC’s rebate 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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