Grayscale Investments is crafting its initial arguments against the SEC following the agency’s denial of the company’s bitcoin ETF proposal, although some are unconvinced the decision will be overturned.

“Right now we’re just laser-focused on working with the court, setting up briefing schedules and going from there,” Grayscale Chief Legal Officer Craig Salm told Blockworks. “We think that we have very common-sense and compelling arguments here and we think the court will be able to see that as well.”

Grayscale filed a petition for review with the US Court of Appeals for the District of Columbia Circuit Wednesday evening when the SEC rejected the conversion of its bitcoin trust (GBTC) to an ETF. 

The firm expects to submit written arguments over the next couple months, Salm said. Grayscale’s attorneys estimate that the suit could take between nine and 12 months at the appellate level. 

The company argues the SEC is acting “arbitrarily and capriciously” under the Administrative Procedures Act (APA), Salm said. The agency, he added, is also discriminating against issuers by approving futures-based bitcoin ETFs but denying proposed spot-based bitcoin products.

“Both types of ETFs are priced based on the underlying bitcoin markets, and so if you’re OK with one for an ETF, then you also should be OK with the other,” Salm said Friday. “They’re two like investment vehicles that are just being treated [differently] in this situation.”  

Will Grayscale win?

Dave Nadig, financial futurist at VettaFi, told Blockworks that the SEC’s congress-approved mandate gives the agency “extremely clear authority” to regulate rule-making about the activities of securities exchanges. 

“I think it’s a very tough case for [Grayscale] to win,” he said. “The SEC explicitly is allowed to approve and deny exchange rules based, essentially, on whatever they like.”

To rule in Grayscale’s favor, Nadig added, the SEC would essentially have to decide that because it allowed derivatives products, it must allow a product focused on the underlying asset.  

“This seems pretty stretchy to me,” he said. “By that logic, they’d have to allow all sorts of really unworkable products, like a physical oil product.”

Leah Wald, CEO of Valkyrie Funds, said in a series of Twitter posts Thursday that suing the SEC is not likely to succeed, noting that regulators could potentially approve a spotbitcoin ETF before Grayscale’s lawsuit ends.

“Not many people expect this suit to go in favor of Grayscale and there isn’t much precedent for such an outcome to occur,” Wald tweeted. “But in order to keep assets flowing in and ensure institutions remain engaged, this is the only real move they have left.”

The SEC also rejected Bitwise Asset Management’s spot bitcoin ETF application this week.  The San Francisco-based company refiled its proposal last October, attaching roughly 150 pages of research focused on price discovery in the crypto markets.

No spot bitcoin ETF has ever been approved in the US, and a number of industry watchers have said they do not expect one to launch until 2023 at the earliest.

Greg King, CEO of crypto fund issuer Osprey Funds, said the SEC’s decisions on the Grayscale and Bitwise applications were what he expected.

“We believe the SEC’s concerns around offshore trading of bitcoin have not been sufficiently addressed,” King told Blockworks in an email. “This rejection confirms our belief that no spot bitcoin ETF will be approved in [SEC Chair Gary] Gensler’s administration.”

Gensler’s current five-year term expires in 2026.

Some issuers continue to try to launch a product though, as asset manager VanEck filed a new application for a spot bitcoin ETF. The firm’s previous application for such an offering was denied last November. 

A VanEck spokesperson declined to comment on the filing.

GBTC had about $12 billion in assets on Friday. The investment vehicle was trading at a 31% discount to its net asset value (NAV) on Thursday, which was about 2 percentage points more than the day before the SEC’s decision.

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