Grayscale Hoping for SEC Win, Also Prepping GBTC Contingency Plan

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Giv­en Grayscale Invest­ments’ suit against the SEC — alleg­ing the watch­dog erred in deny­ing its bid to con­vert its bit­coin trust to an ETF — is months from a res­o­lu­tion, indus­try par­tic­i­pants told Block­works on Thurs­day they’re eying anoth­er reg­u­la­to­ry alternative. 

Grayscale Bit­coin Trust (GBTC) has per­sis­tent­ly trad­ed at a wide dis­count to the price of the spot bit­coins it holds, with its net asset val­ue (NAV) hov­er­ing around 40%. The lat­est pro­posed solu­tion: a Reg­u­la­tion M relief fil­ing with the SEC. 

Reg­u­la­tion M, if grant­ed, allows for a fund to simul­ta­ne­ous­ly cre­ate and redeem shares, Grayscale said in a Q&A detail­ing how such a con­ver­sion would play out.

The rule “is designed to pre­vent manip­u­la­tion by indi­vid­u­als with an inter­est in the out­come of an offer­ing, and pro­hibits activ­i­ties and con­duct that could arti­fi­cial­ly influ­ence the mar­ket for an offered secu­ri­ty,” the Finan­cial Indus­try Reg­u­la­to­ry Author­i­ty (FINRA) said

Grayscale sued the SEC in June 2022 after the US secu­ri­ties reg­u­la­tor denied its spot bit­coin ETF appli­ca­tion. Since, the firm has received wide­spread sup­port from the indus­try, includ­ing back­ing from lob­by­ing groups includ­ing the Blockchain Asso­ci­a­tion, the Cham­ber of Dig­i­tal Com­merce, Coin Cen­ter and exchange Coinbase. 

The law­suit is expect­ed to take between nine and 12 months at the appel­late lev­el, Grayscale Chief Legal Offi­cer Craig Salm told Block­works in October. 

If the SEC approves GBTC’s con­ver­sion to an ETF, Reg­u­la­tion M relief would be grant­ed, Grayscale said. 

“The SEC will use the FTX sit­u­a­tion to argue that their posi­tion is cor­rect — that GBTC shouldn’t be con­vert­ed to an ETF,” said Jef­frey Blockinger, Quadrata’s gen­er­al coun­sel. “The delay in push­ing reg­u­la­tion for­ward on Capi­tol Hill could in turn be used by the SEC to rein­force its stance towards the GBTC appli­ca­tion to become an ETF.” 

Grayscale could opt to apply for Reg­u­la­tion M approval now, before the law­suit is set­tled, which would elim­i­nate the dis­count to net asset val­ue, accord­ing to Mes­sari CEO Ryan Selkis.

GBTC’s cur­rent dis­count to bit­coin of around 40%, accord­ing to data from YCharts, has marked an uptick from the approx­i­mate­ly 30% dis­per­sion for most of 2022. When the trust launched in 2017, it trad­ed at a pre­mi­um, which has large­ly steadi­ly declined ever since.

“If you want­ed to liq­ui­date your posi­tion [in GBTC], you have to sell shares on the open mar­ket, and cur­rent­ly, there isn’t the demand there once was for GBTC, which has result­ed in the 40% dis­count,” said David Schwed, chief oper­at­ing offi­cer at blockchain secu­ri­ty firm Hal­born. “Should they con­vert to an ETF, the thought is the dis­count would dis­ap­pear because Reg­u­la­tion M sta­tus would allow for the fund to create/redeem shares with the cur­rent demand of the mar­ket, which should elim­i­nate the discount.”

GBTC is not like­ly to con­vert to an ETF — at least not any time soon — accord­ing to Selkis, and fil­ing for Reg­u­la­tion M relief now would help investors. 

“The odds of Grayscale win­ning its case vs SEC in light of relat­ed par­ty trans­ac­tions with Gen­e­sis Trad­ing, Gen­e­sis Cap­i­tal, and at least two bank­rupt coun­ter­par­ties (Block­Fi and 3AC) are now 0,” Selkis said on Twit­ter. “Delays in pur­su­ing a Reg M pro­gram hurt share­hold­ers while enrich­ing DCG/Grayscale.”

Oth­ers argue Grayscale may be clos­er to ETF approval, even amid ongo­ing tur­moil in the indus­try. Tom Emmer, who recent­ly became the House’s Repub­li­can whip, has been a vocal pro­po­nent of spot bit­coin ETFs for over a year. 

Of course, Con­gress is not involved in Grayscale’s cur­rent law­suit, and the issue of spot ETFs in the cryp­to space [is] like­ly not a major con­cern at the time being, accord­ing to Schwed.

“I don’t believe, giv­en the lat­est events that have unfold­ed, that the SEC is look­ing at this as a pri­or­i­ty since one of the rea­sons for the rejec­tion was over the con­cerns of mar­ket manip­u­la­tion amongst cryp­to com­pa­nies,” Schwed said.


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