The United States might soon record its first-ever Bitcoin exchange-traded fund (ETF). This exciting development comes on the heels of a recent directive from a federal appeal court, which instructed the US Securities and Exchange Commission (SEC) to reassess its decision to reject Grayscale Investments’ proposal to transform the Grayscale Bitcoin Trust (GBTC) into an ETF.
The legal triumph could pave the way for a groundbreaking development in the US financial landscape. Advocates of this financial product have long contended that such an ETF would democratize access to Bitcoin, making it easier for a broader range of individuals to invest in the cryptocurrency without navigating the complexities of direct purchases.
Historically, the SEC has consistently turned down applications for similar ETFs. However, the latest court decision has rekindled hopes among prospective applicants for a favorable outcome.
Court Decision Raises Hopes For Bitcoin ETF Approval
In the ruling by Circuit Judge Neomi Rao for the DC Circuit Court of Appeal, a fundamental principle was emphasized: Federal agencies must treat similar cases uniformly. Judge Rao noted a disparity in the SEC’s treatment of different Bitcoin-related products, particularly in their recent approval of two Bitcoin futures funds while denying Grayscale’s Bitcoin fund.
The court sided with Grayscale’s argument that its proposed Bitcoin ETF has material similarities to the approved Bitcoin futures ETPs. The ruling criticized the SEC’s lack of transparent justification for the disparate treatment of these products, deeming it “arbitrary and capricious.”
The court’s judgment underscores that the core of the matter lies not in the rejection itself but in the deficiency of the SEC’s explanation. The decision states that Grayscale had effectively demonstrated the similarities of its proposed ETF to the recently approved Teucrium and Valkyrie Bitcoin futures products.
This warrants, according to the court, equal regulatory treatment for all. However, it’s important to note that the court did not mandate the SEC to approve Grayscale’s ETF application instantly.
Instead, the SEC was directed to undertake a fresh evaluation of the application. Responding to the ruling, a spokesperson for Grayscale expressed optimism, describing it as a “monumental step forward for American investors.”
The spokesperson confirmed that the legal team reviewed the decision and would strategize the subsequent steps in collaboration with the SEC.
Grayscale’s Persistence On The Path To ETF Conversion
Grayscale Investments, renowned as the manager behind the world’s largest cryptocurrency fund, initiated the journey toward a Bitcoin ETF in October 2021. However, the SEC rejected the initial proposal, raising concerns about market manipulation possibilities and other potential risks.
Following the rejection, Grayscale filed an appeal against the SEC’s decision, setting the stage for the recent court ruling. This development follows prominent asset management firms’ applications for spot Bitcoin ETFs.
Asset management giant BlackRock’s application in June garnered considerable attention, fueling optimism within the industry regarding the potential approval of a spot Bitcoin ETF. Other industry players like Fidelity have also sent their respective applications to the financial regulator.
Notably, seven Bitcoin futures ETFs have already been trading since 2021.
Market Impact And Industry Expectations
The Grayscale product has been trading at a discount relative to its underlying asset since February 2021. This discount had widened to an all-time high of 50% in December, triggered by the SEC’s reiterated reasons for rejecting the company’s ETF conversion request.
However, as established players entered the race for Bitcoin spot ETFs, the discount on GBTC narrowed to around 25%, marking the most minor discount observed since early 2022. Meanwhile, Market experts have long asserted that transforming a closed-end fund to an ETF could nullify the discount on GBTC.
These experts’ prediction arises from the typical behavior of ETFs, which tend to trade close to their intrinsic value. The structure of the fund is expected to undergo limited modifications.
Fund shares will now be registered with the SEC under the Securities Act 1933. Earlier, GBTC shares were primarily offered through a private placement process, exclusively accessible to accredited investors initially, and subject to a six-month holding period.
Additionally, the shares will transition from over-the-counter markets to the NYSE. This structural update will also enable redemptions, a previously absent feature.
Grayscale had indicated a willingness to reduce its fees to enable the GBTC transformation. Presently, the fund charges a mandatory annual fee of 2%. Meanwhile, an SEC spokesperson revealed that the agency is actively reviewing the court’s decision and considering the most appropriate action.
