Grayscale Launches Appeal Against SEC, and Its Shares Rally

The sponsor of its battered bitcoin fund labels as “arbitrary” the agency’s nixing of its ETF conversion request.

Cryptocurrency asset manager Grayscale Investments attacked the Securities and Exchange Commission’s denial of its plan to convert its bitcoin closed-end fund into an exchange-traded fund. In spirited remarks Tuesday, Grayscale’s attorney slammed the SEC ruling as the “definition of arbitrary decision making.”

Grayscale Bitcoin Trust’s long-suffering stock price rose 9.6% Tuesday after the opening hearing on its lawsuit against the agency. That’s some unaccustomed good news for the trust, the largest bitcoin fund. The shares have dropped almost in half from 12 months ago and about 80% from their peak in 2021, when crypto was riding high.

The suit, Grayscale Investments v. Securities and Exchange Commission, under review before the U.S. Court of Appeals for the District of Columbia Circuit, turns on the firm’s ability to expand its availability to the market and perhaps reverse its long price decline.

If the Grayscale fund could convert to ETF status, it could then easily create and redeem shares, a liquidity-enhancing plus for Grayscale. CEFs generally lack those features. Previously, Grayscale had tried treating its fund like an ETF, able to issue new shares, but in 2014, the SEC barred the practice.

To the SEC, the problem with the Grayscale proposal is that it is based on spot bitcoin prices. The regulator says these spot prices are open to manipulation. The commission has, however, greenlighted other bitcoin ETFs that track bitcoin futures, which the SEC believes are safer.

Grayscale argues that the difference between spot and futures prices is not so great as to merit its fund being barred from becoming an ETF. Bitcoin changes hands via lightly regulated crypto exchanges such as Coinbase (i.e., the spot market), while the coin’s futures trade on the highly regulated Chicago Mercantile Exchange. The SEC also has turned down other requests to switch spot-price crypto funds into ETFs.

The spot and futures vehicles are essentially “like” products, with “99.9% correlation,” Grayscale’s lawyer, Don Verrilli, a former U.S. solicitor general and a partner in Munger, Tolles & Olson, told the three-judge panel, Yahoo Finance reported. 

The SEC countered that Verrilli’s contention is unproven. “The key empirical question is whether fraud and manipulation in the spot market impacts CME futures in the same way,” Emily True Parise, an attorney for the SEC, told the court. “We don’t have conclusive data.”