Latest Grayscale Suit Adds Pressure for SEC to Clarify Crypto Industry Rules

December 09, 2022

The latest lawsuit against Grayscale Investments over its nearly $11 billion Grayscale Bitcoin Trust (GBTC) and remaining questions about the launch of spot bitcoin ETFs are highlighting the need for regulatory guidance, according to industry players and analysts. 

Hedge fund Fir Tree Capital Management filed a complaint to the Delaware Chancery Court Tuesday, alleging that New York-based Grayscale’s GBTC issued shares but failed to redeem them. Moreover, Fir Tree is seeking to keep Grayscale from converting GBTC into a spot bitcoin exchange-traded fund, an endeavor the Connecticut-based companies had pursued since last year.  

As ETF issuers attempt to increase access to cryptocurrency markets, growing negative outlook on and increasing regulatory hurdles around the asset class make for an uncertain future.  

“Had the SEC stepped in earlier to create a framework that would have allowed for ETF products, we would have had safe and transparent vehicles for U.S.-based folks to invest in crypto,” said Katherine Dowling, general counsel at Bitwise Asset Management, noting that regulation would be necessary for the approval of any spot bitcoin exchange-traded products.  

Spot Bitcoin ETF 

Grayscale is currently embattled with the Securities and Exchange Commission regarding GBTC’s possible conversion to an ETF, which the regulatory agency denied earlier this year. In June, Grayscale sued the SEC over the rejection. The watchdog has denied spot bitcoin ETFs from listing on U.S. exchanges for over nine years.  

“We're going to see more pressure on the SEC to actually propose and adopt real clear rules telling the industry how to operate,” said Annemarie Tierney, principal at Liquid Advisors, in an interview with ETF.com.  

She added that the SEC’s current denial of spot bitcoin ETFs was “arbitrary,” noting the “capricious manner” given the approval of other crypto ETF strategies.  

While there are 18 cryptocurrency or blockchain ETPs on the U.S. market now, if GBTC is converted, it would be the first to offer retail investors access to a spot strategy. In the aftermath of FTX’s demise, concerns have risen that the SEC may be more resolved than ever to not approve one.   

Grayscale’s GBTC is currently trading at a record 48% discount to the value of its underlying coin, one indication that investors also remain skeptical that the SEC will allow the trust to convert into an ETF anytime soon.  

“In 2013, we launched Grayscale Bitcoin Trust (GBTC) to provide investors with access to bitcoin—always with the intention of converting it to an ETF when permitted by U.S. regulators,” a Grayscale spokeswoman said in a note to ETF.com. “We remain 100% committed to converting GBTC to an ETF.”

Other issuers of cryptocurrency and blockchain-enabled funds also seek to work together with regulators to bring products to the market.  

“We know that regulatory concerns take time to address and appreciate the due diligence in doing so,” Will Peck, head of digital assets at WisdomTree, told ETF.com. He pointed to the years it took to get to the WisdomTree Short-Term Treasury Digital Fund (WTSYX) to market.  

“This type of collaboration with regulators is one we firmly believe in to provide investors with confidence given the reality of the space today,” he noted. 

 

Contact Shubham Saharanat[email protected]      

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