GBTC Lawsuit: Grayscale’s Reply Brief


For more than 850,000 investors, converting GBTC to a spot bitcoin ETF would unlock over $4 billion of value by providing the regulatory relief necessary for the product to simultaneously create and redeem shares, thereby enabling arbitrage to address both premiums and discounts of the shares as compared to net asset value.* This conversion would also subject trading in GBTC to heightened regulatory standards and enhance investor protections. The SEC’s reluctance to further bring bitcoin into the regulatory perimeter through a spot bitcoin ETF has prevented U.S. investors from gaining the bitcoin investment exposure they both want and deserve.


Our Chief Legal Officer, Craig Salm, leads Grayscale’s legal team. Below, he answers some questions about our latest filing in our SEC litigation.

*Based on Broadridge Financial Solutions, Inc. analysis of Grayscale Bitcoin Trust (Symbol: GBTC) as of March 9, 2022.
We use the generic term “ETF” to refer to exchange-traded investment vehicles, including those that are required to register under the Investment Company Act of 1940, as amended (the “‘40 Act”), as well as other exchange-traded products that are not subject to the registration requirements of the ‘40 Act.


Discount to net asset value is based on the difference between the Digital Asset Holdings and Market Price of GBTC as of January 12, 2023.


1. What’s happened since Grayscale initiated legal proceedings in 2022? How did we get here?


The SEC’s decision to deny our application to convert GBTC to a spot Bitcoin ETF was delivered in June 2022. On the same day, our Senior Legal Strategist, former U.S. Solicitor General and partner at Munger, Tolles & Olson, Donald B. Verrilli, Jr., filed a Petition for Review to initiate the litigation process and challenge the SEC’s decision.


Since then we have filed our Opening Brief on October 11, 2022, which was the first substantive document submitted to the court to explain the legal basis of Grayscale’s arguments. Following our brief, five amicus briefs were filed by amici representing a variety of valuable, unique, and high-quality perspectives across the traditional finance sector; crypto trade associations, think tanks and advocacy groups; academics and former SEC, CFTC, and OCC regulators; and other key stakeholders. Then, in December 2022, the SEC filed its first brief addressing our arguments, which we discussed here. That’s where proceedings in the litigation stood until today.


2. What is the “Reply Brief” that was recently filed, and what does it say?


In contrast to our Opening Brief, this Reply Brief is significantly shorter (41 pages vs. 100 pages) and addresses counterpoints made by the SEC in its brief, while also re-emphasizing key substantive arguments from Grayscale’s Opening Brief.


You can access the brief here.


Although bitcoin may be a relatively new asset, the legal issues in the litigation are straightforward:  The SEC acted arbitrarily and capriciously, and discriminated against issuers, in denying the conversion of GBTC to a spot bitcoin ETF after it approved ETFs that hold bitcoin futures (a derivative of bitcoin).


Our conclusion is supported by (1) quantitative market analysis indicating near perfect correlation (i.e., 99%+) between bitcoin futures and spot bitcoin and their corresponding indices and (2) the SEC’s “significant market test”, which (i) is applied arbitrarily: relaxed for bitcoin futures ETFs, but impossibly strict for spot bitcoin ETFs, and (ii) exceeds their statutory authority. In arbitrarily applying this test in a results-driven manner to pick winners and losers, the SEC is inappropriately acting as a merit-based regulator, running far afield from its disclosure-based regulatory mandate. Their filings have not justified these actions. As the brief concludes: “The Commission is not permitted to decide for investors whether certain investments have merit—yet the Commission has done just that to the detriment of investors and potential investors it is charged to protect.”


3. We’re in a moment of broad distrust of the entire ecosystem. Are there broader implications for this lawsuit on the crypto community?


Our lawsuit is about determinations on questions of law. Despite the SEC’s historical reluctance, or current perceptions of the crypto industry more generally, this is a legal case about fair and equal treatment under the law. That means events and speculation surrounding Terra/LUNA, 3AC, Celsius, Voyager, FTX, Alameda, BlockFi, Genesis Capital, Gemini, DCG, or anyone else are not relevant to the ultimate question the Court will have to answer: Did the SEC act arbitrarily and capriciously, and discriminate against issuers, in denying the conversion of GBTC to a spot bitcoin ETF after it approved ETFs that hold bitcoin futures (a derivative of bitcoin)? That’s it.


In times like these, when a significant amount of trust and confidence in the crypto ecosystem has been damaged, regulated access to the asset class is more important than ever. Products like spot ETFs would further open up access to bitcoin for those that want to hold it in the form of a security, in their brokerage or retirement account, through a regulated investment vehicle, with SEC reports, audited financials, tax documents, and the like.


I and the team at Grayscale understand that not everyone falls into that category, but there will likely always be people who want to access bitcoin through accountable centralized intermediaries and platforms. For example, based on existing laws, rules and regulations, many large institutions are legally required to delegate custody and therefore need third party service providers. And if you support the Bitcoin protocol, I think it’s clear why you would want more ways for people to access bitcoin – even if those bitcoin are wrapped in something else on a 1:1 basis, such as an ETF or other financial product.


We are fighting for all those who believe in the future of bitcoin. So if you’re long bitcoin – whether you self-custody your private key(s) on a piece of paper, cryptosteel, hardware wallet, a brainwallet in your head, or entrust them to a third party – I encourage you to support our ETF case.


Ultimately, though, this case is most important for the more than 850,000 shareholders who hold GBTC for whom converting GBTC would unlock more than of value.


4. What are the next steps in the legal proceedings?


Final briefs are due February 3, 2023. Then, three judges will be selected from the pool of DC Circuit judges, and the DC Circuit Court of Appeals will share a schedule for the lawsuit’s oral arguments.


Oral arguments may be as soon as Q2 of 2023. Donald B. Verrilli, Jr. will represent Grayscale during the oral arguments and answer any of the judges’ questions. The SEC’s lawyers will have that same opportunity. We expect the oral arguments will be recorded and later shared with the general public.


A final decision in the DC Circuit Court of Appeals could come by the Fall of 2023, but timelines are not yet certain. As always, our shareholders and community can follow along for updates on our website here.

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