Will GBTC's transition to a Bitcoin spot ETF give Grayscale a chance to win over the SEC?

Grayscale, the asset management firm, filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) last June after its GBTC transformation into a Bitcoin spot ETF was rejected. The two parties began their first arguments in early March. Bloomberg's litigation analyst Elliot Stein now believes that Grayscale has a 70% chance of winning.

GBTC Holds Most Bitcoin

GBTC holds nearly 630,000 bitcoins, accounting for 3.2% of the total bitcoin circulating supply, making it the oldest cryptocurrency trust fund. The well-known investment firm Ark Invest invests in bitcoin through GBTC. Established in 2013, Grayscale initially dominated the market and was highly sought after, with premiums exceeding 80% at one point. However, with the rise of new market players and the bankruptcies of Three Arrows Capital and FTX, GBTC's advantage has diminished, with discounts exceeding 50% at one point. Grayscale is eager to address the significant discount by transitioning to a bitcoin spot ETF.

To learn more about the evolution of Grayscale products, please see: Grayscale Bitcoin Fund Sets New Discount Record, ETF Conversion Seems Distant, Grayscale Product Evolution History from GBTC

To understand how GBTC has become a tool for financial operations, please see: Arthur Hayes Discusses the Rise of DCG Empire, Understanding Financial Operations in One Chart

Application for Spot ETF Denied, Lawsuit Filed against SEC

In June last year, Grayscale's proposal to transition GBTC into a bitcoin spot ETF was rejected. Refusing to accept the reasons given by the U.S. Securities and Exchange Commission (SEC), Grayscale filed a lawsuit against the agency. Despite the SEC approving multiple bitcoin futures ETFs, they rejected Grayscale's application citing concerns about market manipulation and investor protection. In early March, the first round of debates began, during which Judge Neomi Rao questioned the SEC's understanding of the relationship between spot and futures.

Bloomberg litigation analyst Elliot Stein believes that Grayscale has a 70% chance of winning. If this happens, it would be the first victory for any crypto company under SEC regulation. If Grayscale wins in court, the price of bitcoin is expected to soar after the ruling.

Michael Sonnenshein, CEO of Grayscale, commented in a recent interview:

We left the courtroom feeling encouraged and hopeful that these arguments will hold weight in court. While I can appreciate that the new management team at Alameda is seeking to recoup assets in the short term from a trustee's perspective, converting GBTC to an ETF would unlock the most value for shareholders, including Alameda, and is the most optimized long-term product structure for GBTC.

However, analyst Elliot Stein also mentioned that winning in court does not necessarily mean the ETF application will be approved. He commented:

The most likely scenario is that the court will remand the case back to the SEC for the agency to rethink its reasoning, which could prolong the process.

Analysts expect a judgment from the court in the third quarter.