Given Grayscale Investments’ suit against the SEC — alleging the watchdog erred in denying its bid to convert its bitcoin trust to an ETF — is months from a resolution, industry participants told Blockworks on Thursday they’re eying another regulatory alternative.
Grayscale Bitcoin Trust (GBTC) has persistently traded at a wide discount to the price of the spot bitcoins it holds, with its net asset value (NAV) hovering around 40%. The latest proposed solution: a Regulation M relief filing with the SEC.
Regulation M, if granted, allows for a fund to simultaneously create and redeem shares, Grayscale said in a Q&A detailing how such a conversion would play out.
The rule “is designed to prevent manipulation by individuals with an interest in the outcome of an offering, and prohibits activities and conduct that could artificially influence the market for an offered security,” the Financial Industry Regulatory Authority (FINRA) said.
Grayscale sued the SEC in June 2022 after the US securities regulator denied its spot bitcoin ETF application. Since, the firm has received widespread support from the industry, including backing from lobbying groups including the Blockchain Association, the Chamber of Digital Commerce, Coin Center and exchange Coinbase.
The lawsuit is expected to take between nine and 12 months at the appellate level, Grayscale Chief Legal Officer Craig Salm told Blockworks in October.
If the SEC approves GBTC’s conversion to an ETF, Regulation M relief would be granted, Grayscale said.
“The SEC will use the FTX situation to argue that their position is correct — that GBTC shouldn’t be converted to an ETF,” said Jeffrey Blockinger, Quadrata’s general counsel. “The delay in pushing regulation forward on Capitol Hill could in turn be used by the SEC to reinforce its stance towards the GBTC application to become an ETF.”
Grayscale could opt to apply for Regulation M approval now, before the lawsuit is settled, which would eliminate the discount to net asset value, according to Messari CEO Ryan Selkis.
GBTC’s current discount to bitcoin of around 40%, according to data from YCharts, has marked an uptick from the approximately 30% dispersion for most of 2022. When the trust launched in 2017, it traded at a premium, which has largely steadily declined ever since.
“If you wanted to liquidate your position [in GBTC], you have to sell shares on the open market, and currently, there isn’t the demand there once was for GBTC, which has resulted in the 40% discount,” said David Schwed, chief operating officer at blockchain security firm Halborn. “Should they convert to an ETF, the thought is the discount would disappear because Regulation M status would allow for the fund to create/redeem shares with the current demand of the market, which should eliminate the discount.”
GBTC is not likely to convert to an ETF — at least not any time soon — according to Selkis, and filing for Regulation M relief now would help investors.
“The odds of Grayscale winning its case vs SEC in light of related party transactions with Genesis Trading, Genesis Capital, and at least two bankrupt counterparties (BlockFi and 3AC) are now 0,” Selkis said on Twitter. “Delays in pursuing a Reg M program hurt shareholders while enriching DCG/Grayscale.”
Others argue Grayscale may be closer to ETF approval, even amid ongoing turmoil in the industry. Tom Emmer, who recently became the House’s Republican whip, has been a vocal proponent of spot bitcoin ETFs for over a year.
Of course, Congress is not involved in Grayscale’s current lawsuit, and the issue of spot ETFs in the crypto space [is] likely not a major concern at the time being, according to Schwed.
“I don’t believe, given the latest events that have unfolded, that the SEC is looking at this as a priority since one of the reasons for the rejection was over the concerns of market manipulation amongst crypto companies,” Schwed said.
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