The U.S. Securities and Exchange Commission (SEC) faced a court backlash in August when its rejection of Grayscale’s attempt to transform its Bitcoin Trust (GBTC) into an Exchange-Traded Fund (ETF) was deemed invalid. This decision was criticized as “arbitrary and capricious” by the D.C. Circuit Court of Appeals, stating that federal agencies must treat similar cases consistently.
The SEC, which had until midnight on a recent Friday to contest the court’s decision, opted not to appeal. This development increases the likelihood of Grayscale being able to convert its Bitcoin Trust into a more investor-friendly ETF, potentially becoming the first Bitcoin ETF in the United States.
The court’s ruling in August highlighted the inconsistency in the SEC’s treatment of different Bitcoin investment products. The SEC had recently greenlit the trading of two Bitcoin futures funds on national exchanges but denied approval for Grayscale’s Bitcoin fund.
Following this news, the price of Bitcoin surged above $27,000. Grayscale’s Bitcoin Trust (GBTC) is currently the largest cryptocurrency fund globally, but it has been trading at a discount to its Bitcoin holdings since February 2021. The discount, which had at one point reached nearly 50%, has since narrowed to around 17%.
Grayscale has argued that converting GBTC into an ETF would eliminate the discount by aligning the fund’s price more closely with the underlying Bitcoin. ETFs use a creation-redemption model, allowing the creation of new shares to meet demand or their redemption to reduce supply.
While the SEC’s decision not to appeal is a positive signal for the potential approval of the Bitcoin ETF, it remains uncertain how the SEC will proceed in the next stages of reviewing Grayscale’s application. The agency retains the authority to deny it for other reasons, although such decisions could be challenged in court by Grayscale.
It’s worth noting that Grayscale is not the only entity seeking SEC approval for a Bitcoin ETF. Other entities, including BlackRock and Fidelity, are also awaiting regulatory approval for their respective Bitcoin spot ETF applications.