Court Cites ‘Lack of Explanation’ From SEC in Grayscale Victory

Grayscale Bitcoin Trust (GBTC), a prominent crypto asset manager, achieved a significant legal victory on August 29 against the United States Securities and Exchange Commission (SEC) in its long-winded pursuit of transforming its over-the-counter GBTC application into a listed Bitcoin ETF.

Recent court documents from August 29 revealed that the U.S. Court of Appeals Circuit Judge Neomi Rao has granted Grayscale’s request for review and ordered the SEC’s denial of the GBTC listing application to be nullified. 

Judge Rao had previously criticized the SEC for lacking an explanation for its stance against Grayscale – something that continues to plague investors and the overall finance sector as part of the SEC’s futile “regulation by enforcement” approach.

Grayscale Investments CEO, Michael Sonnenshein, took to Twitter to announce that their legal team is actively assessing the court’s opinion.

According to the court’s opinion, it emphasized the SEC’s failure to provide a detailed explanation, which only operates to unlawfully regulate these types of financial products.

“The Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP,” the court said. “In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.”

Quick Recap

Grayscale currently stands as the largest over-the-counter traded Bitcoin fund, managing assets exceeding $14 billion – however, its legal battle with the SEC began on June 29, 2022, after the SEC rejected Grayscale’s bid to convert GBTC into a spot ETF. 

Following the SEC’s 2021 approval of ProShares’ futures-based bitcoin ETF, Grayscale chose to call out the regulatory watchdog in efforts of forcing an explanation of its decision to the broader landscape.

Subsequently, former U.S. Solicitor General Donald B. Verrilli Jr., who is now Grayscale’s senior legal strategist, filed a petition for review with the United States Court of Appeals for the District of Columbia Circuit on June 30. 

At the time, Sonnenshein expressed strong disagreement with the SEC’s decision and the disappointment of Grayscale.

In October 2022, Grayscale ended significant agreements with its partner and digital currency broker Genesis Global. Later, on November 16, 2022, Genesis Global halted withdrawals, citing market turmoil tied to the collapse of cryptocurrency exchange FTX. Genesis Global also faced repercussions from the failure of Singaporean crypto hedge fund Three Arrows Capital, leading to a $1.2 billion debt owed to Genesis that remains unpaid.

Throughout the litigation, GBTC shares also experienced nearly a 50% discount to the net asset value due to these ongoing legal disputes with the SEC and credit concerns related to its parent company, Digital Currency Group (DCG). 

By January 2023, it was revealed that DCG owed creditors more than $3 billion and was considering selling a $500 million venture capital portfolio. Genesis Global, on the other hand, owed $900 million specifically to participants in the cryptocurrency exchange Gemini’s Earn program.

Immediately following this legal victory, Bitcoin surpassed $27K for the first time since August 17. However, it’s important to note that this latest legal ruling doesn’t guarantee an immediate listing of a Grayscale spot Bitcoin ETF.