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D.C. appeals court to hear oral arguments in Grayscale lawsuit against SEC

The District of Columbia Court of Appeals has set a date to hear oral arguments in Grayscale's lawsuit challenging the Securities and Exchange Commission's decision to deny the conversion of its Grayscale Bitcoin Trust to an exchange-traded fund.‍

January 24, 2023
4 minutes
minute read

The District of Columbia Court of Appeals Has Set a Date To Hear Oral Arguments In Grayscale's Lawsuit Challenging the Securities and Exchange Commission's Decision To Deny the Conversion Of Its Grayscale Bitcoin Trust To an Exchange-traded Fund.

The court has ordered that both sides will present their case at 9:30 a.m. ET on March 7. Grayscale had previously expected oral arguments to begin in the second quarter.

Grayscale filed a lawsuit against the SEC in June 2022 after the agency rejected its application to turn its bitcoin trust, better known by its ticker GBTC, into an ETF. The company decided to pursue the ETF, which would be backed by bitcoin rather than bitcoin derivatives, after the SEC approved ProShares’ futures-based bitcoin ETF in October 2021.

The SEC's
ruling on Grayscale's application faced ultiple delays, but the SEC ultimately rejected the application last summer. The SEC cited Grayscale's failure to answer questions related to concerns about market manipulation and investor protections.

Investors are staying away from the crypto market after a tough year in 2022. Challenging macroeconomic conditions and the collapse of Terra and the bankruptcies of Three Arrows Capital, Celsius, Voyager and FTX have all taken their toll. Crypto lender Genesis, the sister company of Grayscale, filed for bankruptcy Thursday.
Crypto investors are still hoping to see the SEC approve a U.S. spot bitcoin ETF. They see this as a way to open the crypto market to more institutional investment, rather than just a way to get more investment from individuals.

Investors have become concerned about the potential harm GBTC could do to shareholders. The shares have been trading at a growing discount to NAV (currently around 40%), and the structure of the trust means that shares can't be redeemed. Many agree that the best path forward for investors would be for the SEC to give Grayscale the green light to convert the trust into an ETF.

GBTC is a crypto product that allows investors to trade bitcoin in their brokerage accounts. It was launched in 2013, before the approval of bitcoin ETFs in Canada or bitcoin futures ETFs in the US. As of Monday, GBTC had $14.5 billion in assets under management. Grayscale charges a 2% annual fee to investors, making it a cash cow for parent company Digital Currency Group, led by Barry Silbert. Silbert has been under fire from many investors in crypto, most recently Gemini's Cameron Winklevoss.

Fir Tree Capital Management has filed a lawsuit against Grayscale, alleging potential mismanagement and conflicts of interest with respect to the GBTC fund.
Both the Valkyrie and Osprey Funds have urged Grayscale to withdraw as sponsor of GBTC, and name their respective funds as the new sponsor instead. This would give shareholders a better path to lower management fees and the implementation of a redemption program.

Bryan Curtis
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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