A lawsuit to allow the first Bitcoin (Bitcoin stock) exchange-traded fund is grinding forward, and the stakes, now at about $4.3 billion, keep growing.
Grayscale Investments late Tuesday filed the opening brief in an effort to force the Securities and Exchange Commission to allow the firm to convert the Grayscale Bitcoin Trust (GBTC) into an ETF. CEO Michael Sonnenshein called the filing ” the next milestone” in the firm’s litigation. Grayscale executives have said the case is on track for a potential decision next summer.
For GBTC’s investors, the stakes have never been higher. The closed-end trust now trades at a 36% discount to the value of the Bitcoin it holds, close to the largest discount in the fund’s history, according to Morningstar. If GBTC was converted to an ETF, institutions could create and redeem shares instantly, allowing the discount to vanish and making investors billions.
The SEC for years has blocked the release of ETFs that hold spot Bitcoin, citing issues such as the lack of regulation and fraud surveillance on the exchanges where the coins are traded. Grayscale’s brief argues that the decision is arbitrary and unreasonable in light of the SEC’s approval of Bitcoin futures products such as the ProShares Bitcoin Strategy ETF (BITO).
The SEC’s decision “blatantly violates that fundamental norm” of treating similar cases in the same way, the brief says.
An SEC spokesperson declined to comment. The agency in the past has noted that Bitcoin futures trade on regulated platforms, such as the Chicago Mercantile Exchange, even if Bitcoin itself doesn’t—a point that Grayscale says is a distinction without a difference.
Investors considering GBTC as a way to buy Bitcoin at a discount should understand that the gap might get worse before it gets better.
For one, the discount right now isn’t so much a reflection of Grayscale’s prospects to convert into an ETF as it is a sign of negative sentiment about crypto overall, said Morningstar senior analyst Bobby Blue. Indeed, the discount has widened as Bitcoin prices have plummeted over the past year, driven by both big-picture factors like the Federal Reserve’s interest-rate increases and industry-specific disasters like the collapse of major crypto firms earlier this year.
“At its simplest, it’s more sellers than buyers,” Blue said. “This is really a retail instrument. The fact that the discount is widening at the same time retail investors are bailing on crypto as a whole is not a coincidence.”
Blue said that Grayscale in theory could close the discount itself by buying back GBTC shares, retiring them, and selling the underlying Bitcoin, an option typically open to closed-end funds. However, Grayscale’s Sonnenshein says GBTC’s structure means that isn’t feasible.
“A redemption program would require approvals that have never been given. There’s no precedent for doing so,” Sonnenshein said. “We remain one hundred percent focused on converting GBTC into an ETF.”
The second way the discount could close is if Grayscale wins its lawsuit. But that could take a long time. The case falls under an area of the law that lets Grayscale skip the lower courts and head straight to the appellate level, and executives say they have been told a decision could come as soon as next summer.
Yet other cases in the same court have taken years, analysts have noted, and a win for Grayscale isn’t guaranteed. The next major step in the case will come next month, when the SEC files its reply brief.
The final way the GBTC discount might close is the surest bet, but could take the longest. Regulators, as well as lawmakers of both parties, have long argued that crypto-trading platforms like Coinbase COIN –1.77% and FTX ought to register as exchanges monitored by the SEC or the Commodity Futures Trading Commission, or perhaps both.
Bitcoin Stock As A Commodity
A Senate bill with support from both Democrats and Republicans, for example, would classify Bitcoin as a commodity and put the exchanges that offer it under the CFTC’s purview. With Congress likely out of session until the November midterm elections, the bill has little time to move forward this year, but it has a decent chance of passing in 2023.
If exchanges were to register and subject themselves to the sort of surveillance the SEC says is now lacking, it could obviate the agency’s reasoning for the ETF denial. The $4 billion discount could vanish once and for all.
Featured Image: Megapixl © Antalya
Author Valerie Remorosa 
