Grayscale gearing up for legal fight to create bitcoin ETF

As the company awaits a court ruling on a June lawsuit against the SEC, CEO Sonnenshein said he was prepared to appeal if the court backed the SEC’s decision to reject the bitcoin ETF proposal

Crypto asset manager Grayscale Investments is preparing for a prolonged legal battle with the U.S. Securities and Exchange Commission (SEC) to create a spot bitcoin exchange traded fund (ETF), said the chief executive officer of the company.

As the company awaits a court ruling on a June lawsuit against the Securities and Exchange Commission, CEO Michael Sonnenshein said he was prepared to appeal if the court backed the Securities and Exchange Commission’s decision to reject the bitcoin exchange traded fund proposal.

The SEC rejected Grayscale’s application to covert its flagship GBTC into an exchange traded fund in June, arguing that the proposal did not meet standards designed to prevent fraudulent practices and protect investors.

Grayscale sued the Securities and Exchange Commission after its proposal was denied, claiming that the regulator was acting arbitrarily in rejecting applications for spot bitcoin ETFs when it had previously approved bitcoin futures Exchange Traded Funds.

The case would either go to the U.S. Supreme Court or an en banc panel review if either party were to appeal the ruling. According to Sonnenshein, oral arguments in the case are scheduled for March 7 and the firm expects a final ruling in the fall.

GBTC has $14.5 billion Assets Under Management (AUM), according to the website of the crypto asset manager. The Grayscale Bitcoin Trust discount to bitcoin is nearly 41 per cent, coming under pressure after crypto exchange FTX collapsed and crypto lender Genesis suspended withdrawals.

There are further concerns about contagion. Venture capital Digital Currency Group (DCG) owns both Genesis and Grayscale, and questions as to whether the Digital Currency Group would have to sell its Grayscale Bitcoin Trust holdings have also weighed on the discount.

On Jan. 19, the crypto lending unit of Genesis filed for bankruptcy.

According to Sonnenshein, Grayscale had no operational reliance on Digital Currency Group or Genesis, and was unaffected by the bankruptcy. Still, Genesis owned about 5 per cent of total Grayscale Bitcoin Trust shares outstanding, according to a person familiar with the matter.

Grayscale is a standalone entity with its own leadership, governance, budgets, policies and procedures, and the assets underpinning the Grayscale family of products belong to its respective shareholders, Sonnenshein said.

If Grayscale’s legal challenge to the Securities and Exchange Commission was unsuccessful, it would explore options to return a portion of Grayscale Bitcoin Trust’s capital to shareholders, Sonnenshein told investors in December.