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On August 29, 2023, a panel of judges from the Washington, D.C. Circuit Court of Appeals reversed the SEC's decision from June 2022 to deny Grayscale Bitcoin Trust's (GBTC) conversion to a spot Bitcoin ETF. This marks a significant milestone in the GBTC conversion process and is considered a victory for GBTC shareholders, the Grayscale team, and the broader Bitcoin, cryptocurrency, and investment community.
Following the court's ruling, our legal team, along with lawyers from Davis Polk & Wardwell and Munger Tolles & Olsen, has sent a letter to the SEC outlining important information to consider when deciding the next steps. Here is the content of the letter:
Dear Mr. Zhu, Ms. Barbero, and Ms. Countryman,
We write on behalf of our client, Grayscale Investments, LLC, the sponsor of the Grayscale Bitcoin Trust (BTC). We are pleased to have the opportunity to engage with the staff of the Securities and Exchange Commission (the "Commission") in light of recent developments and to discuss the path forward as the Trust continues to work toward its conversion to an exchange-traded product ("ETP").
On June 29, 2022, the Commission disapproved NYSE Arca, Inc.'s proposed rule change under Section 19(b)(1) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 19b-4 thereunder to list and trade shares of the Trust. Subsequently, Grayscale sought review of the Commission's action in the United States Court of Appeals for the District of Columbia Circuit pursuant to Section 25(a) of the Exchange Act. On August 29, 2023, the Court of Appeals vacated the Commission's disapproval order.
With the Court of Appeals having spoken and in light of the Commission's opportunity to conduct a comprehensive analysis of the Court's opinion based on the full record, including the reasons for denial articulated in the vacated order, as well as the evidence and arguments submitted by Grayscale, NYSE Arca, and public commenters, we believe the Commission should conclude that there is no basis for treating the Trust differently from ETPs invested in Bitcoin futures contracts trading on the Chicago Mercantile Exchange ("CME") that are subject to Rule 19b-4. Accordingly, the Commission should expeditiously approve the Trust's Rule 19b-4 filing.
If there were any other reasons to attempt to distinguish spot Bitcoin ETPs from Bitcoin futures ETPs—whether based on the Exchange Act's requirements that rules be "designed to prevent fraudulent and manipulative acts and practices" or otherwise—we believe that such a distinction would appear in one of the fifteen Commission orders that previously denied Rule 19b-4 applications for spot Bitcoin ETPs, at least one of which was issued after Bitcoin futures ETPs began trading.
Grayscale raised this issue nearly two years ago (before all of these adverse orders) explaining why it was unreasonable to deny the Rule 19b-4 application after the Commission had determined it could approve a Bitcoin futures ETP under Section 6(b)(5) of the Exchange Act. However, now that the Court of Appeals has spoken and based on the legal analysis the Commission employed when denying spot Bitcoin ETPs previously, there does not appear to be any available rationale for distinguishing Bitcoin futures ETPs from spot Bitcoin ETPs.
As the Commission has consistently explained, this is because:
"listing exchanges for Bitcoin-based ETPs can discharge their obligations under Section 6(b)(5) of the Exchange Act by demonstrating that they have entered into comprehensive surveillance-sharing agreements with markets of significant size related to the underlying or reference assets."
This is the exact standard the Court of Appeals expressly found to have been satisfied:
"Grayscale has demonstrated that its proposed Bitcoin ETP is materially similar to the already-approved Bitcoin futures ETP. First, the underlying assets—Bitcoin and Bitcoin futures—are closely related. Second, the monitoring sharing agreement with CME is the same and should have the same capacity to detect fraud or manipulation in the Bitcoin and Bitcoin futures markets."
The Trust's Rule 19b-4 filing is currently approaching three times the time allowed by Section 19(b) of the Exchange Act for Commission action. NYSE Arca originally filed the proposed rule change for the Trust on October 19, 2021, and the Commission published notice of the proposed rule change in the Federal Register on October 19, 2021. Pursuant to Section 19(b)(1), the Commission initiated a 45-day period during which it was required to approve or disapprove the proposed rule change, a period that could be extended an additional 45 days under Section 19(b)(2)(A)(ii), until February 6, 2022, which the Commission exercised on December 15, 2021. On February 4, 2022, the Commission filed suit pursuant to Section 19(b)(2)(B), in which the Commission is required to approve or disapprove no later than 180 days after the publication date of November 8, 2021 (originally scheduled for May 7, 2022), and may extend the ultimate deadline an additional 60 days. On May 4, 2022, the Commission extended the deadline and, on June 29, 2022, rejected the application—eight months and one week short of the maximum eight months allowed by Congress for final action.
Thus, the Commission's review of the Trust's Rule 19b-4 filing is now significantly longer than the time allowed by Section 19(b) of the Exchange Act. Under Section 19(b)(2)(D), if the Commission does not issue an order within the time required by statute, the proposed rule change is deemed to have been approved by the Commission in some manner. We question whether a later disapproval order would be effective. The Court of Appeals completely relieved the Commission of its obligation to act within the statutory timeframe to avoid being deemed approved under Section 19(b)(2)(D). But assuming arguendo that deemed approval does not apply—at least when the Commission promptly reconsiders the submission in accordance with the Court's reasoning—we believe the Commission should consider three points in contemplating its next steps.
First, every day the Trust remains unlisted on NYSE Arca, existing investors in the Trust suffer from trading prices significantly below net asset value, a harm that can be avoided if the Trust is treated similarly to Bitcoin futures ETPs already approved by the Commission. Indeed, on the day the Court of Appeals announced its ruling, the yield on Grayscale's 19b-4 Rule was tightened by more than 600 basis points due to the expected eventual approval of Rule 19b-4, meaning over $2 billion in assets was returned to investors in a single trading day—even when the price at the time was more than $3 billion below the Trust's net asset value, which the Trust would have been trading at if it had been operating as an ETP.
Second, U.S. investors seeking regulated Bitcoin investment products should not be forced to accept less efficient and structurally more complex products solely because these are the only product types not yet approved by the Commission. Spot ETPs are favored by investors and have proven successful in other commodity contexts such as gold. Over time, investors and issuers of spot Bitcoin products, like Grayscale, cannot compete with the benefits enjoyed by Bitcoin futures ETPs, which have the use of well-established ETP wrappers to grow assets under management. As a specific illustration of this harm, on the day of the Court of Appeals' decision, Bitcoin futures ETPs saw net inflows, with daily average net flows during the prior thirty days more than 800% higher than in prior thirty-day periods. It can be reasonably assumed that if the Trust had been operating as an ETP on that day, it would have attracted the bulk of those investments.
Third, in recent weeks, the Commission has received filings under Rule 19b-4 relating to multiple proposed spot Bitcoin ETPs, each of which seeks to compete with the Trust. As Grayscale noted in its comment letter responding to these filings, all of the projects from each of the twelve listing exchanges that proposed to enter into surveillance-sharing agreements with major U.S. Bitcoin spot marketplaces. Grayscale's letter explained that the Commission's previous orders approving Bitcoin futures ETPs made clear that the Commission need only find a market of significant size related to the underlying or reference asset that can adequately discharge its obligations under Section 6(b)(5) of the Exchange Act by entering into a comprehensive surveillance-sharing agreement. Therefore, based on the Court of Appeals' reasoning, we believe the Commission is now unlikely to impose additional new requirements on spot Bitcoin ETPs beyond what it has previously articulated for Bitcoin futures ETPs.
With the Trust prepared for operation as an ETP upon Commission approval, we respectfully urge you to agree that the best course of action now is for the Commission to issue an order approving NYSE Arca's Rule 19b-4 filing and authorize the staff to work with Grayscale and NYSE Arca to expeditiously bring the Trust to market. We believe that the Trust's nearly one million investors should have the benefit of this competitive environment without further delay.
We look forward to discussing these issues with the Commission and its staff. |
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Post time 9-9-2023 05:41:42