Grayscale sues SEC following Bitcoin ETF rejection

Grayscale sues SEC following Bitcoin ETF rejection

Grayscale sues SEC following Bitcoin ETF rejection

The Securities and Exchange Commission (SEC) rejected an application by Grayscale Investments to convert its Grayscale Bitcoin Trust (GBTC) to an exchange traded fund  (ETF) on Wednesday.

Within days of having announced preparations in anticipation of a proposal approval, Grayscale has wasted no time and has immediately initiated a lawsuit against the SEC. In a press release, Grayscale said that it had “filed a petition for review” ... "challenging the decision by the SEC to deny conversion of GBTC to a spot ETF”. It went on to state that it “vehemently disagrees” with the SECs decision on the basis that the Commission is failing to apply consistent treatment to similar investment products and that it’s acting arbitrarily and unpredictably.

It appears that Grayscale had prepared well for this outcome given the speed at which it has filed the lawsuit. Earlier this month, it had retained Donald Verilli,  a former Solicitor General of the US, as legal counsel. In Grayscale’s press release, Verilli said that the SEC was acting in violation of the Administrative Procedure Act and the Securities Exchange Act.

Critical response

While Grayscale moved quickly in filing their lawsuit, reaction was equally expedient from the crypto community. The Head of Policy at the Blockchain Association, Jake Chervinsky, said that the SECs decision was “deeply disappointing”. On the basis that the SECs mission is to protect investors, Chervinsky said that the decision “defies both common sense and federal law” as an ETF is without question, a better product.

Ryan Selkis, founder and CEO of crypto market intelligence firm Messari, has been scathing in his criticism of Gary Gensler during his tenure as chairman of the SEC. In hosting a Twitter Spaces last night, Selkis said that the SEC is “rejecting it because they can, they’re certainly not acting in the interests of investors”. He went on to say that regulators should be applauded when they’re thoughtful and protect investors through common sense regulation. “That’s not what’s going on here - everybody knows it”. . .“I want Grayscale to win and I hope [the SEC] lose badly”.

At the time of writing, SEC commissioner Hester Peirce hadn’t responded to our request for comment on the development.  However, earlier this month she said that “it is time for the Commission to stop denying categorically spot crypto exchange traded products”. In contrast with Gensler, Peirce has been perceived by many in crypto as a voice for progressive regulation within the sector.

High management fee

Although most commentary within crypto suggests that Grayscale has the higher moral ground on this issue, there are calls for it too to take action to support investors.

The Grayscale Bitcoin Trust charges an exorbitant 2% management fee, and investors are currently locked in to a product that has gone from trading at a premium to trading at a discount relative to the Bitcoin spot price.

Prominent Bitcoiner Vijay Boyapati called on Grayscale to “do the right thing” and wind down the fund, returning the underlying Bitcoin to investors. Others have pointed out that investors knew what they were getting into while BlockTower Capital founder Ari Paul clarified that the discount goes away immediately if the SEC relents and allows GBTCs conversion into an ETF.

Under Gary Gensler, the SEC has pursued a number of actions against crypto companies.

The recent liquidity crisis indicates that progressive regulation could be beneficial for all stakeholders. However, the Commission has been criticized for not clearly defining which crypto projects it classifies as securities, casting uncertainty over the sector. It’s on this basis that enterprise blockchain company Ripple is currently going toe to toe with the SEC in the courts. Whilst that process appears to be going well for Ripple, the justice system moves slowly.

Grayscale may have moved quickly in filing their lawsuit but we can expect the process to drag on for quite some time.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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