US Court Questions the SEC Over Its Denial of Grayscale Bitcoin Fund Proposal, GBTC Shares Shoot

On Tuesday, March 7, a panel of judges from the US federal court questioned the U.S. Securities and Exchange Commission (SEC) while seeking the basis of denial for converting Grayscale’s Bitcoin fund application into a spot Bitcoin ETF.

Last June 2022, the US SEC had rejected Grayscale application to convert the Bitcoin fund GBTC into a spot Bitcoin exchange-traded-fund citing lack of investor protection standards and anti-fraud measures.

The questions came during an oral arguments in the US court overseen by Judges Sri Srinivasan, Neomi Rao, and Harry Edwards.  SEC Senior Counsel Emily Parise argued that Grayscale lacked the required data in order to determine “whether fraud and manipulation in the spot market impacts futures [markets] in the same way.”

While the SEC has been open to approving Bitcoin futures ETFs, they have been reluctant to approve a spot version of the same. Representing Grayscale, former U.S. Solicitor General Don Verrill argued that SEC’s denial of converting GBTC into a spot Bitcoin ETF contradicted the agency’s previous decision of approving the futures-based Bitcoin ETFs.

He further termed the SEC’s denial as “the definition of arbitrary decision-making”. Don Verilli argued that Grayscale’s spot market ETF would pose the “same risk of fraud and manipulation” with the currently approved Bitcoin products that trade on the Chicago Mercantile Exchange (CME).

Judge Neomi Rao, however, argued that the futures price of Bitcoin is nothing but a derivative of the asset’s spot price which moves together 99.9% of the time.

She said that the SEC hasn’t provided enough information or evidence that Grayscale’s claims are wrong. She added: "It seems like it's fine for an agency to say okay, we need some more information, but it seems there's quite a bit of information here on how these markets work together, and the SEC has not offered any explanation... that the petitioners here are wrong. The Commission really needs to explain [...] how it understands the relationship between Bitcoin futures and the spot price of Bitcoin.”

Post the court hearing, the Grayscale Bitcoin Trust (GBTC) share price shot up by 9.60% during Tuesday’s trading session ending at $12.90 levels. The GBTC shares have been trading at a significantly lesser valuations against the Bitcoin held by the Trust partly due to the product’s structure. However, this huge discount is also preventing shares from being redeemed for Bitcoin.

If GBTC gets converted to a spot Bitcoin ETF, the share price will track the price of Bitcoin more closely as arbitragers trade the difference away. Despite yesterday’s rally, the GBTC shares still trade at 42% discount relative to the assets under management by Grayscale.