SEC Must Review Grayscale’s ETF Bid After Previous Rejection, Appeals Court Rules

The U.S. may be about to get its first spot bitcoin exchange-traded fund, after a federal court ruled that the U.S. Securities and Exchange Commission (SEC) must review its rejection of Grayscale Investments’ attempt to convert the Grayscale Bitcoin Trust (GBTC) into an ETF.

Grayscale Investments, the manager behind world’s largest cryptocurrency fund, first applied for its GBTC closed-end fund to be converted into an exchange traded fund in October 2021. The SEC rejected the application, stating in its decision that the application failed to answer the SEC’s questions about preventing market manipulation, as well as other concerns.

Grayscale then filed an appeal against the SEC barely an hour after the regulatory agency rejected its application. In the filing, Grayscale asked the U.S. Court of Appeals for the District of Columbia Circuit to review the SEC’s order. Grayscale is a unit of Digital Currency Group, which is also the parent of CoinDesk.

The court decision comes after a flurry of large institutions filed applications for spot bitcoin ETFs, with asset manager BlackRock filing its application in June. BlackRock’s filing generated a large amount of optimism that a spot bitcoin ETF might be approved. Others like Fidelity, the large mutual-fund manager, have also applied for bitcoin ETFs. Seven bitcoin futures ETFs have been trading since 2021.

The Grayscale product has traded at a discount to the underlying asset since February 2021. The discount deepend to a record 50% in December after the SEC reiterated its reasons for denying Grayscale’s application to convert the trust into an ETF. However, following large names filing for bitcoin spot ETFs, GBTC saw its discount narrow to levels of around 25%, the smallest discount since early 2022.

Market analysts have long said that the conversion from a closed-end fund to an ETF will likely eliminate the discount of GBTC entirely, due to the nature of ETFs which generally trade close to their fair value.

The structure of the fund will largely stay the same, bar a few things. The shares will now be registered with the SEC under the Securities Act of 1933. Prior to the conversion, GBTC shares were offered through a private placement process — meaning they were initially only available to accredited investors and subject to a six month holding period.

Another alteration to the structure is the shares will be uplisted from over-the-counter markets to the NYSE Arca. The new structure will also allow for redemptions, which were not previously allowed.

Grayscale previously stated that it would lower its fees if GBTC got converted to an ETF. The fund charged a 2% annual fee.