Grayscale Bitcoin Fund Rises as Judges Sound Skeptical of SEC’s Arguments on ETF

During oral arguments held Tuesday, judges for the U.S. Court of Appeals for the District of Columbia Circuit sounded consistently skeptical of arguments made by the SEC justifying its decision to disallow the conversion of Grayscale Bitcoin Trust (ticker: GBTC ) to an ETF. The SEC has already approved ETFs that hold Bitcoin futures, such as the ProShares Bitcoin Strategy (BITO), and the case is about whether the SEC acted arbitrarily in denying applications for ETFs that hold Bitcoin directly.

The Grayscale trust, which is known by the ticker GBTC, surged after oral arguments finished, rising as much as 13%, although Bitcoin itself was little changed.

The SEC has for years rejected Bitcoin ETF applications by Grayscale and others, arguing that the platforms where the tokens trade do not have adequate monitoring to detect fraud and manipulation. On the other hand, the agency has approved funds that hold Bitcoin futures, which trade in regulated commodity markets. Grayscale says delineating between the futures and spot markets is a distinction without a difference, since the spot price governs the futures.

Spot Bitcoin and Bitcoin futures funds “present the same risk of fraud and manipulation,” said Donald Verrilli, a former Obama administration attorney who represented Grayscale in the case.

The battle has far-reaching implications not just for GBTC, but for the crypto market as a whole.

Right now, GBTC trades as a closed-end fund, which means prices can diverge widely from the underlying Bitcoin. On Monday, the fund traded at a 42% discount.

If the fund became an ETF, causing the discount to close, about $5.9 billion in value could accrue to the fund’s investors. Other fund companies, which have similarly tried and failed to launch such products, are also likely to swarm the market with their own applications for ETFs if Grayscale wins the case.

During Tuesday’s oral argument, the justices pressed the SEC on the distinction between the spot and futures markets and asked what data, exactly, the agency wanted Grayscale to show to prove that monitoring the futures market was a sufficient proxy for monitoring it for spot Bitcoin.

“In approving the futures ETPs, it appears that the Commission must have necessarily concluded that this arrangement would prevent fraud and manipulation in the underlying spot market, because they recognize the relationship between the two markets and the approved rule for the futures product ,” said Justice Neomi Rao, while questioning the SEC.

SEC attorney Emily True Parise said the agency needed to see additional data on whether fraud and manipulation in the futures market affects the spot market “in the same way” before agreeing futures market surveillance was sufficient.

“That’s the missing piece,” Parise said.

After Tuesday’s oral arguments, the court could make its decision as soon as this summer, although Grayscale executives have said they believe a decision is more likely in the fall.

A spokesperson for the SEC declined to comment.

Shades of Grey, of late, has come under pressure not just from regulators, but from its own investors. On Monday, the bankruptcy estate of failed hedge fund Alameda Research sued FTX’s sister company, Grayscale, alleging that it charged exorbitant management fees and unfairly prevented shareholders from redeeming their shares for the underlying Bitcoin.

Investors betting on GBTC’s ETF conversion should be cautious because judges’ tones during arguments often do not indicate how they ultimately decide. Also, even if Grayscale wins the case, the judges noted, the SEC could still reject Grayscale’s application on a different basis or choose to revise its decision to approve Bitcoin futures funds.

Parise said she could not speculate on what the commission would decide to do if it lost.

Write to Joe Light at [email protected]