Grayscale Blasts SEC’s ‘Illogical’ Denial of GBTC Conversion

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Grayscale Invest­ments’ law­suit against the SEC took anoth­er step for­ward Fri­day as the cryp­toas­set man­ag­er called out the reg­u­la­tor for “illog­i­cal” reasoning.

The com­pa­ny sued the SEC in June after it chose to block the Grayscale Bit­coin Trust (GBTC) from becom­ing an ETF.

Grayscale’s lat­est brief, filed Fri­day in the US Court of Appeals for the Dis­trict of Colum­bia Cir­cuit, was a response to the SEC’s fil­ing sub­mit­ted last month. 

The issue at hand, Grayscale has said, is that the SEC’s approval of ETFs that invest in CME-trad­ed bit­coin futures, but not for exchange-trad­ed prod­ucts (ETPs) that invest in bit­coin direct­ly — such as GBTC — is dis­crim­i­na­to­ry. The firm claims the reg­u­la­tor is vio­lat­ing the Admin­is­tra­tive Pro­ce­dure Act and The Secu­ri­ties Exchange Act of 1934.

In the SEC’s Decem­ber fil­ing for the Grayscale case, the reg­u­la­tor said bit­coin futures funds and spot bit­coin funds “are not the same” adding they have “fun­da­men­tal dif­fer­ences in the abil­i­ty to detect and deter fraud and manipulation.” 

In Friday’s brief, Grayscale lawyers crit­i­cized the regulator’s “scant rebut­tal,” not­ing that fraud or manip­u­la­tion in the bit­coin spot mar­ket would affect the price of bit­coin futures. 

The US bit­coin futures ETF hold­ing CME futures con­tracts relies on the Bit­coin Ref­er­ence Rate — the same spot prices as GBTC, it adds.

“The commission’s brief nev­er comes to terms with the order’s arbi­trary premise and the dis­crim­i­na­to­ry result it has pro­duced,” Grayscale lawyers wrote in the brief. “Instead, the com­mis­sion goes on for page after obfus­ca­to­ry page point­ing out dif­fer­ences between the spot bit­coin and bit­coin futures mar­kets that have no bear­ing on the issue before this court.”

An SEC spokesper­son did not imme­di­ate­ly return a request for comment.

Final briefs are due Feb. 3 and oral argu­ments are set to be sched­uled after judges for the case are selected.

Grayscale’s Chief Legal Offi­cer Craig Salm said in a Fri­day blog post that the court could reach a deci­sion by the fall. 

“In times like these, when a sig­nif­i­cant amount of trust and con­fi­dence in the cryp­to ecosys­tem has been dam­aged, reg­u­lat­ed access to the asset class is more impor­tant than ever,” he added.

Trust under scrutiny

GBTC, which launched in 2013 and holds $12 bil­lion in assets, has not allowed redemp­tions for years. 

The trust has been trad­ing at a near­ly 40% dis­count to its net asset val­ue this week, accord­ing to YCharts.com. 

The com­pa­ny has said con­vert­ing GBTC to an ETF would offer the reg­u­la­to­ry relief for the prod­uct to simul­ta­ne­ous­ly cre­ate and redeem shares, essen­tial­ly get­ting rid of pre­mi­ums and discounts. 

Grayscale has faced pub­lic pres­sure of late. Valkyrie Invest­ments pro­posed tak­ing over GBTC and an online cam­paign seeks to offer investors “a cred­i­ble path to redemptions.”

Hedge fund firm Fir Tree Part­ners launched a law­suit last month alleg­ing “mis­man­age­ment” of GBTC and seek­ing more infor­ma­tion into the trust’s inner work­ings. The com­plaint also calls Grayscale’s attempt to con­vert GBTC to an ETF “waste­ful.”

Grayscale called the suit “base­less” in a state­ment last week and said it would seek to clar­i­fy “numer­ous mis­char­ac­ter­i­za­tions” in the Delaware Court of Chancery.


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