Grayscale is set to present oral arguments in its case against the U.S. Securities and Exchange Commission on Tuesday.
The asset manager brought the case against the regulator for rejecting its proposal to convert its flagship fund, GBTC, into a spot bitcoin ETF.
Don Verrilli, lead counsel for Grayscale, laid out his key arguments during a breakfast last month. The former U.S. Solicitor General said basic norms govern the actions of agencies like the SEC, meaning they have to "conduct themselves in a manner that is not arbitrary and capricious, and they’ve got to engage in reasoned decision making."
An agency can act in an arbitrary and capricious manner if they take like cases and treat them differently, Verrilli argued.
The SEC’s decision to approve bitcoin futures ETPs and not approve spot market ETFs is a classic case of "taking like cases and treating them differently," he said. "They just contradict each other, and that’s the essence of our case."
Verilli said the SEC has yet to deal with the issue at hand in any briefs. "They’re not dealing with the reality that these two orders contradict each other. They just don’t want to talk about that," he argued. He added that the regulator has talked about other things without ever coming to terms with that "fundamental contradiction."
Three judges will hear arguments tomorrow: Judge Sri Srinivasan, Judge Harry Edwards, and Judge Neomi Rao. A decision is expected to take about three to six months.
Grayscale expects it will come after the summer.
How we got here
Grayscale saw several proposals to convert GBTC to a spot-based bitcoin ETF rejected in 2022. The asset manager’s application was rejected for a second time in June based on the regulator’s conclusion that the company hadn’t shown sufficient planning to prevent fraud and manipulation.
The firm then filed a lawsuit over the decision. If the SEC has approved bitcoin futures ETFs, Grayscale argued, the door was open for a spot-based fund — a contention the regulator disputed.
The agency has reasoned that futures products are harder to manipulate as the market is smaller and based on futures prices from the CME, which is CFTC-regulated.
The SEC continued to argue much the same point through the end of the year. In December, the regulator said its rejection was "reasonable, reasonably explained, supported by substantial evidence," with "no inconsistency in the Commission’s disapproval of Grayscale’s spot ETP despite having approved two CME bitcoin futures ETPs."
The SEC said its disapproval of the proposed ETF did not reflect an "impermissible, merits-based skepticism of bitcoin as an investment."
Discount to NAV
Perhaps one of the most important elements of GBTC in recent years has been its discount to net asset value, at which the shares in the fund trade. The discount has narrowed to 42% ahead of tomorrow’s hearing, according to The Block’s data, meaning shares in the fund are 42% cheaper than the value of the bitcoin in the fund.
Unlike other investment products, GBTC shares don’t grant investors a right to underlying bitcoin since there is no redemption program in place currently.
The lack of this function means that since 2014 there has been a disparity between GBTC’s trading price and its net asset value. GBTC sold at a premium before flipping to a discount in early 2021.
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