Crypto asset manager Grayscale — which stewards over $43 billion in cryptocurrencies — has filed a lawsuit against the United States Securities and Exchange Commission (SEC) shortly after the federal securities watchdog tossed out its application to convert its flagship Bitcoin Trust into a bitcoin exchange-traded fund, or ETF.
Grayscale Takes SEC To Court
The SEC rejected Grayscale’s application late Wednesday on the grounds that it did not do enough to shield investors from “fraudulent and manipulative acts and practices.”
The SEC also cited concerns about the lack of a surveillance-sharing agreement between a listing exchange and a regulated market of significant size that it believes is necessary to “detect and deter fraudulent and manipulative activity”, something that the regulator has reiterated over the years when denying other similar crypto-backed spot EFT applications.
A few hours after the SEC announced its decision, Grayscale CEO Michael Sonnenshein took to Twitter to announce the company had lodged a legal challenge against the regulator.
In the “petition for review” filing with the United States Court of Appeals for the District of Columbia, the world’s biggest digital asset manager is contesting the agency’s decision to block the conversion of the GBTC vehicle to a spot bitcoin EFT.
“Grayscale supports and believes in the SEC’s mandate to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation — and 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 posited in a Wednesday press release.
Grayscale applied to transform shares of its GBTC into a physically-backed fund in October 2021. The investment firm even rolled out a campaign to garner support to convince the SEC to approve its application. Reportedly, over 11,400 comments have been submitted to the regulatory body so far, with 99.96% of those comments in support of the spot bitcoin ETF.
Ruling In Lawsuit Likely Within 12 Months
Grayscale first revealed it was ready to sue the agency in case of rejection in May this year. The company then hired former U.S. Solicitor General, Donald B. Verrilli, Jr., in readiness for a potential spat with the SEC.
While GBTC is supposed to trade relatively close to the actual price of BTC, it’s presently trading at a 27% discount. This means that it’s considerably cheaper to buy than actual bitcoin — good for investors yet to get in, but not too good for those whose shares are locked up.
By converting the trust into the sought-after spot bitcoin ETF, Grayscale expects to rectify the discount and allow it to levy lower fees, subsequently making it easier for customers to move money in and out of the fund.
Nonetheless, the SEC — headed by chair Gary Gensler — appears convinced that the possible detriments to investors and the public overshadow the obvious benefits of approving Grayscale’s ETF application. Whether the U.S. Court of Appeals concurs with the SEC is anyone’s guess.
Meanwhile, Grayscale’s Sonnenshein told CNBC that the case heads straight to the appellate court due to the fact that the defendant is a government regulator. He hopes judgment will be passed within nine to twelve months.