The SEC's disconcertingly uneven approach toward the crypto sector is now receiving some much-needed push-back from the courts in the US, reigniting the hope among crypto enthusiasts that the cornered sector might be able to win enough of a reprieve to graduate to adolescence. While Ripple managed to notch the first significant win against the SEC just a couple of weeks back, today the limelight belongs to the Grayscale Bitcoin Trust (GBTC).
For the benefit of those who might not be aware, Grayscale has been diligently trying to convert its Bitcoin Trust into a Spot ETF for quite some time. A spot Bitcoin ETF will make it extremely convenient for investors to acquire exposure to Bitcoin without the pitfalls associated with futures-based ETFs. It would also rectify the recurring deviation of the trust’s NAV from Bitcoin’s price, prompted by the fact that the trust, as per the prevailing law, is not allowed to redeem its units. This means that when the trust’s NAV trades at a discount to Bitcoin’s spot price due to an onslaught of selling pressure, the trust has no mechanism to restore convergence with Bitcoin's spot price.
A few months back, the SEC rejected Grayscale’s application to convert its Bitcoin Trust into a spot ETF, prompting the firm to mount a lawsuit by alleging unfair treatment. Specifically, Grayscale asserted that its proposed Bitcoin exchange-traded product was materially similar to the Bitcoin futures exchange-traded products and, as such, should have been approved for trading on the NYSE Arca.
BREAKING: There it is, @Grayscale wins their lawsuit against the SEC. DC Circuit court of appeals is vacating SEC's denial of $GBTC's conversion into an ETF. pic.twitter.com/gqFvMpmfnm
— James Seyffart (@JSeyff) August 29, 2023
We had noted in a previous post that the decision on Grayscale's lawsuit against the SEC was imminent. Well, the judgment was delivered just moments ago, with Judge Rao Srinivasan ordering the SEC to re-examine Grayscale's conversion application.
The D.C. Circuit Court of Appeals holds that the SEC acted in an arbitrary and capricious in denying Grayscale's proposed bitcoin fund.
This is a hard standard to meet: it's the Court telling the SEC it had no basis for the decision & just made it up.https://t.co/UtGjLjSbwc
— Palley (@stephendpalley) August 29, 2023
While today's judgment does not automatically entail the approval of a spot Bitcoin ETF, it does increase the probability of such an eventuality.
This is a brutal quote from Rao:
"The Commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decisionmaking." pic.twitter.com/ss97nhwAGU
— James Seyffart (@JSeyff) August 29, 2023
Do note that there is no set timeline within the judgment that would compel the SEC to deliver its ruling expeditiously. This means that the apex financial regulator in the US can still use inertia to its benefit and prolong this review process. Of course, the SEC still has 45 days to appeal today's ruling.
UPDATE: The $GBTC discount is compressing fast. Was 25% yesterday at close. I have it currently at 17% and still closing pic.twitter.com/AK7SZzlOYl
— James Seyffart (@JSeyff) August 29, 2023
On the bright side, the persistent discount of the Grayscale Bitcoin Trust's NAV relative to the spot Bitcoin price is now closing fast as additional demand emerges, prompted by today's favorable ruling.
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