Grayscale Is Suing SEC After Spot Bitcoin ETF Rejection

By Jason Nelson

The Securities Exchange Commission on Wednesday rejected an application from Grayscale Investments to convert its Grayscale Bitcoin Trust (GBTC) to an ETF, an effort Grayscale has been publicly pushing since April of last year.

Now Grayscale is suing. 

In its ruling, the SEC said the Grayscale spot ETF application did not do enough to protect investors from "fraudulent and manipulative acts and practices."

After the SEC made its announcement, Grayscale CEO Michael Sonnenshein quickly took to Twitter to announce the legal action.

According to Grayscale, the company is filing a “petition for review” with the United States Court of Appeals for the District of Columbia to challenge the decision to deny the conversion of Grayscale Bitcoin Trust to a spot Bitcoin ETF. 

"We are deeply disappointed by and vehemently disagree with the SEC's decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market," said Sonnenshein in a press release.

Sonnenshein went on to say that Grayscale would continue to leverage all of its resources to advocate for its investors and the "equitable regulatory treatment of Bitcoin investment vehicles.”

Earlier this month, in preparation for the SEC decision, Grayscale announced it had hired legal counsel, including Donald B. Verrilli, Jr., former Solicitor General of the United States, and law firm Davis Polk & Wardwell.

"The SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934," Verrilli said in Grayscale's press release responding to the SEC rejection.

Grayscale, founded in 2013, is a subsidiary of Barry Silbert's Digital Currency Group. The company provides market information, investment products, and exposure to digital assets. Since its launch, Grayscale has filed several applications for Bitcoin ETFs.

In a notice to the SEC last October, Grayscale wrote about its approval journey: "Grayscale first submitted an application for a Bitcoin ETF in 2016 and spent the better part of 2017 in conversations with the SEC. Ultimately, we withdrew our application because we believed the regulatory environment for digital assets had not advanced to the point where such a product could successfully be brought to market."

It appears the SEC believes the crypto environment still isn't ready.

What is an ETF and why does Grayscale want one?

An exchange-traded fund (ETF) bundles securities like stocks or commodities, allowing investors to buy shares on the public market without directly owning the assets—in this case, Bitcoin. Last October, the SEC finally allowed a Bitcoin futures ETF, which offers derivative contracts that speculate on the future price of Bitcoin. It has still not allowed a Bitcoin spot ETF, which would be tied to Bitcoin's current price.

According to Grayscale, the Grayscale Bitcoin Trust currently has $12.9 billion under management. Shares in the Grayscale Bitcoin Trust (GBTC) have traded at significantly less than the net value of the Bitcoin held by Grayscale since February 2021. 

By changing the trust into a spot Bitcoin ETF, Grayscale hopes to correct Grayscale Bitcoin Trust’s "discount" and allow the investment firm to charge lower fees, making it easier to move money in and out of the fund.

In April, Grayscale launched a broad marketing campaign asking the public to advocate for a Bitcoin ETF to SEC. The campaign ran in several media outlets, including the New York Times, Wall Street Journal, and Washington Post. 

According to the release from Grayscale, the comment campaign brought in 11,400 total submissions to the SEC. Today's ruling comes a week before the deadline for comments and is the latest setback for Grayscale, which has had every ETF application rejected by the SEC since the firm first began applying in early 2017.

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