The U.S. may be on the verge of getting its first spot bitcoin exchange-traded fund after a federal court ruled that the U.S. Securities and Exchange Commission (SEC) overturned its rejection of Grayscale Investments’ attempt to convert the Grayscale Bitcoin Trust (GBTC) into must review an ETF.
The legal win potentially opens the door for a spot Bitcoin ETF in the US. Proponents have long argued that allowing these types of products would allow a larger segment of the public to invest in Bitcoin without having to bother buying it outright or having to deal with potential problems like their custodial providers collapsing . The SEC has so far rejected every such ETF application, although a new group of applicants are now hoping for success.
“The Securities and Exchange Commission recently authorized two bitcoin futures funds to trade on national exchanges, but denied authorizing Grayscale’s bitcoin fund. Grayscale is seeking a review of the Commission’s denial order, claiming that its proposed Bitcoin exchange-traded product is substantially similar to Bitcoin “They are futures exchange-traded products and should have been admitted to trading on the NYSE Arca. We agree,” she said.
The SEC didn’t explain why it treated these products differently, which made Grayscale’s rejection “arbitrary and whimsical,” she added.
Bitcoin’s price skyrocketed after the ruling was announced.
The ruling seemed to make it clear that the issue was not so much the SEC’s denial of the filing as the agency’s failure to properly explain the denial, which led to Tuesday’s finding.
“Grayscale has demonstrated that its proposed bitcoin ETP is substantially similar to approved bitcoin futures ETPs in terms of relevant regulatory factors,” the ruling reads. “First, the underlying assets — bitcoin and bitcoin futures — are closely related. And second, the surveillance arrangements are identical to the CME and should have an equal likelihood of detecting fraudulent or manipulative behavior in the bitcoin and bitcoin futures market.”
Grayscale made enough arguments that its proposed ETF was similar to recently approved bitcoin futures products Teucrium and Valkyrie to warrant “equal regulatory treatment,” the order said.
The order did not direct the SEC to immediately approve Grayscale’s offer to convert its ETF filing, but instead to reconsider the filing.
“The commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP. In the absence of a coherent explanation, this unequal regulatory treatment of similar products is unlawful. We are therefore granting Grayscale’s request for review rather than overturning the Commission’s order,” the ruling said.
Grayscale Investments, the manager behind the world’s largest cryptocurrency fund, first applied to convert its GBTC closed-end fund into an exchange-traded fund in October 2021. The SEC denied the filing, stating in its decision that the filing failed to meet the SEC’s requirements regarding anti-market manipulation issues and other concerns.
Grayscale then filed an appeal against the SEC less than an hour after the regulator denied her request. In the filing, Grayscale asked the U.S. Court of Appeals for the District of Columbia Circuit to review the SEC’s order. Grayscale is a unit of Digital Currency Group, which is also the parent company of CoinDesk.
The court decision came after numerous large institutions filed applications for spot Bitcoin ETFs, with asset manager BlackRock filing its application in June. BlackRock’s application sparked great optimism that a spot bitcoin ETF could be approved. Others like Fidelity, the major mutual fund manager, have also applied for bitcoin ETFs. Since 2021, seven bitcoin futures ETFs have been traded.
The Grayscale product has traded at a discount to the underlying since February 2021. The discount deepened to a record 50% in December after the SEC repeated its reasons for denying Grayscale’s filing to convert the trust into an ETF. However, after big names applied for bitcoin spot ETFs, GBTC’s discount narrowed to a level of around 25%, its smallest discount since early 2022.
Market analysts have long said that converting from a closed-end fund to an ETF is likely to remove GBTC’s discount entirely, as ETFs generally trade close to fair value.
The structure of the fund remains largely the same except for a few things. The shares will now be registered with the SEC under the Securities Act of 1933. Prior to the conversion, GBTC shares were offered through a private placement process – meaning they were initially only available to accredited investors and were subject to a six-month hold period.
Another change in structure is that the shares will be listed by over-the-counter markets on the NYSE Arca. The new structure will also allow for redemptions that were previously not allowed.
Grayscale previously said it would reduce its fees if GBTC were converted into an ETF. The fund charges an annual fee of 2%.
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