Bitcoin ETFs: behind the scenes of Grayscale's battle with the SEC

An unprecedented judicial decision. On Tuesday, US company Grayscale won a - very important - round in the dispute that has been pitting it against the regulator (the SEC) since 2022, which until now had refused to allow it to launch a Bitcoin Spot ETF (i.e. with real bitcoins under management). What impact could this decision have? We explain.

1/ Grayscale, what is it?

Grayscale is an American asset management company founded in 2013. It is one of the subsidiaries of Digital Currency Group (DCG), which owns Coindesk media and mining company Foundry. DCG also owns Genesis, one of the companies most affected by the FTX collapse at the end of 2022.

Grayscale, which is headquartered in Stamford (north of New York), offers the Grayscale Bitcoin Trust (GBTC). This type of investment vehicle, which is fairly common in the US, allows investors (mainly institutional) to gain passive exposure to bitcoin.

Clients buy GBTC shares and in return the trust buys bitcoins on behalf of its clients. Currently, Grayscale manages $16.2 billion. At the end of November 2022, Coinbase, which acts as custodian, reported holding nearly 635,000 bitcoins.

2/ How does Grayscale work?

When it launched in 2013, Grayscale chose to structure its GBTC as a closed-end fund. Why? Quite simply because there was no other possible structure at the time. This was 10 years ago and bitcoin was a UFO!

The only problem with this system is that the price of a share represents the net asset value of the assets under management and not the real value of the underlying asset, i.e. bitcoin. In other words, the share price cannot perfectly track its price.

You only have to look at the GBTC share price trend to understand the problem: in December 2020, when the markets were rising, the share price was 40% higher than the bitcoin price. Conversely, in December 2022, just a few weeks after FTX fell, the GBTC share was worth 50% less than bitcoin... 😅

3/ Why do they want a Bitcoin Spot ETF?

Unlike other players, Grayscale does not want to launch a Bitcoin ETF product from scratch. They want to transform their trust into an ETF.

The interest for them is fairly simple to understand: a trust is a structure accessible to a limited number of investors with high entry tickets, "whereas an ETF allows you to reach the general public", points out Anne-Sophie Cissey, head of compliance at French market maker Flowdesk.

4/ Does Grayscale have a chance of winning?

This is where it gets tricky, because the SEC can only accept the creation of an ETF if the value of the securities properly represents that of the underlying asset (bitcoin in this case), which is clearly not the case at the moment.

"By entering into litigation with the SEC, Grayscale was no doubt hoping to make the market gloat over a potential positive decision," continues Anne-Sophie Cissey. And thus bring the value of its shares back into line with the market price. Since the decision was announced, the GBTC share price has risen by 10%.

But there could still be other obstacles in Grayscale's path...

Many shadows hang over the opaque links with its parent company DCG, whose financial management has been the subject of mounting doubts since the collapse of FTX.

On the other hand, all the players in the running to launch Bitcoin ETFs, such as BlackRock, could benefit from Tuesday's ruling. "It blew up one of the SEC's main arguments against a Bitcoin Spot ETF," assures Morgane Fournel Reicher, a lawyer specialising in US financial law at Kramer Levin (read our dedicated article).