GBTC Q&A: Legal Updates

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For the more than 850,000 GBTC investors, converting to a spot Bitcoin ETF* would unlock roughly $4.5b of value as of October 11, 2022. This conversion would simultaneously subject GBTC to heightened regulatory standards and enhance investor protections. The SEC’s reluctance to further bring Bitcoin into the regulatory perimeter through spot Bitcoin ETFs has prevented U.S. investors from gaining the safe Bitcoin investment exposure they both want and deserve.

Our Chief Legal Officer, Craig Salm, leads Grayscale’s legal team working to pull together our arguments. Below, he answers some common questions about recent developments.

*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.

1. If Grayscale initiated the lawsuit in June 2022, what is the legal document that was recently filed?

The SEC’s decision to deny our application to convert GBTC to a spot Bitcoin ETF was delivered in June 2022. This was a disappointing outcome, but our team was prepared for all possible scenarios. 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.

Since then, our legal team has been hard at work behind the scenes preparing for the litigation. The opening brief, submitted October 11, 2022, was the first substantive document submitted to the court to explain the legal basis of Grayscale’s arguments for the case.
2. What does Grayscale’s opening brief say?
To summarize, the brief outlines how the SEC’s disparate treatment of spot Bitcoin ETFs was arbitrary, discriminatory, and in excess of statutory authority under the Administrative Procedures Act and Securities Exchange Act of 1934.

First, the brief explains how the Commission has arbitrarily treated spot bitcoin ETFs differently from bitcoin futures ETFs, resulting in discriminatory treatment, even though both derive their pricing from the same underlying spot bitcoin markets. This conclusion is supported by quantitative market analysis, evidenced by this study. 

Second, the brief homes in on a test the SEC has applied in the Bitcoin ETF context, and only the Bitcoin ETF context: the “significant market test”. The test seeks to identify a regulated market of significant size related to the ETF’s underlying bitcoin assets for which the listing exchange has surveillance sharing agreements. The ostensible premise of the test is that fraudulent or manipulative activity in the ETF would be detected from this surveillance of the underlying markets. However, this test has been applied arbitrarily: relaxed for bitcoin futures ETFs, but impossibly strict for spot bitcoin ETFs.

Third, the significant market test itself is deeply flawed and unmoored from the text of the Exchange Act, which requires the SEC to assess whether an exchange’s rules are designed to prevent fraud and manipulation—not to assess whether an exchange has entered into one particular kind of arrangement that may prevent fraud and manipulation. Any such test that would lead to the strange result of passing in the futures context but failing in the bitcoin context could not be sound.

Fourth, the Commission has not adequately explained why this test should be considered the only valid test for Bitcoin ETPs to satisfy the Exchange Act standards. It would be difficult to do so – the test was not required in the context of other commodity-based ETPs such as spot gold ETPs. Why should that test – a test that essentially rewards futures for being subject to two kinds of risk (futures markets risk and underlying spot market risk, which futures are based on), while penalizing spot for only one of those risks (spot market risk) – be the exclusive focus of the analysis for Bitcoin ETPs? 

Fifth, regardless of the test, our proposal to convert GBTC to a spot bitcoin ETF satisfies the requirements of the Exchange Act because it is designed to prevent fraud and manipulation, while protecting investors and the public interest.

Ultimately, all of this is at the expense of US investors. “Although Bitcoin may be a relatively new asset, the legal issue here is straightforward,” the brief explains. 

3. What’s an amicus brief?

Amicus curiae” is Latin for “friend of the court.”  These are individuals and organizations who are not directly participating in the case as parties, but wish to provide some guidance to the court based on their unique perspectives and expertise.

Amicus briefs can present arguments, facts or theories to the court’s attention that the parties have not already addressed. They can also supplement a party’s arguments, or highlight potential legal, economic or social implications of a particular outcome. Amicus briefs can also be helpful in cases involving highly technical or specialized areas of law, or complex statutory and regulatory regimes.

Well-argued briefs from industry peers, academics, and other respected authorities provide important, unique perspectives for a court to consider. 

These documents were submitted following the 11,500+ GBTC comment letters that the investment community shared with the SEC from 2021-2022 during the conversion application process. We continue to be encouraged by the outpouring of public support we’ve received on this matter.

4. Who has filed amicus briefs to support Grayscale’s case?

In Grayscale’s case, five amicus briefs were filed on Tuesday, October 18, 2022, by amici representing a variety of diverse perspectives across the traditional finance sector; crypto trade associations, think tanks and advocacy groups; academics and former regulatory officials; and other key stakeholders.

The amicus briefs can be viewed here:

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

The appellate phase of the litigation process includes initial filings, briefings, oral arguments, and a final court decision. We’re currently in the briefing phase, which will last through the end of the year. At that point, we will have a better idea of where everybody stands going into oral arguments. 

APPELLATE PHASE TIMELINE

June 29, 2022

The SEC denies Grayscale’s application to convert GBTC to an ETF.

June 29, 2022

December 9, 2022

SEC Brief due date

January 13, 2023

Grayscale Reply Brief due date

February 3, 2023

Final Briefs due date

We’re committed to keeping GBTC investors informed throughout this process. For additional information, visit: https://grayscale.com/gbtc-lawsuit/ 

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