Grayscale achieved a milestone victory last night, winning the lawsuit against the SEC regarding GBTC's transformation into a spot ETF. Is the first Bitcoin spot ETF in the United States really around the corner?

In recent times, some narratives in the crypto circle have gradually weakened. Bitcoin has fallen below 26,000 several times, and its market value has fallen below $500 billion, hitting its lowest point since June 20, almost wiping out half of the gains since BlackRock applied for a Bitcoin ETF on June 15.

However, tonight, Grayscale won the lawsuit and overturned the SEC's decision to block the Grayscale ETF. The overall market rose by 6.48% in a short period of time. Bitcoin briefly broke through $28,000, Ethereum briefly broke through $1,700, and Ethereum network gas fees also briefly broke through 100 gwei for a long time. At the same time, STX rose by more than 18% in a short period of time, CYBER rose by 22.81%, and Coinbase's stock price rose by 14.10% during the session, the largest single-day increase since July 13. Many air forces were exposed, and the entire network had a liquidation of more than 80 million US dollars in the past hour.

According to court documents, a three-judge appeals panel in Washington overturned the SEC’s decision to block the Grayscale ETF. The court said that “the rejection of Grayscale’s proposal was arbitrary and capricious because the SEC failed to explain its different treatment of similar products.”

Grayscale said that "this ruling is a milestone for American investors and the Bitcoin ecosystem." The reason why it is a milestone is that if the Bitcoin spot ETF is launched, the cryptocurrency will usher in a historic moment. At that time, GBTC is expected to be smoothly converted into an ETF, and its negative premium will no longer exist.

In the past three years, the SEC has rejected Grayscale for various reasons

As one of the earliest traditional financial institutions to enter the crypto market, Grayscale has planned to apply to convert its BTC Trust into a spot exchange-traded fund (ETF) since October 2020. The growth of assets managed by Grayscale's Bitcoin Trust (GBTC) is better than most registered ETFs in the United States.

During these three years, the SEC used various reasons to reject the application. On November 12, 2021, the SEC rejected the application on the grounds that it did not comply with the requirements of the Securities Exchange Act of 1934 (Exchange Act). On June 30, 2022, the SEC again rejected Grayscale's application to convert its GBTC into a Bitcoin spot ETF. The SEC stated that the application failed to answer the SEC's questions about preventing fraud and manipulation and other concerns.

It was also at this time that Grayscale decided to formally file a lawsuit against the SEC. Compared with the trouble the SEC is looking for in the cryptocurrency industry today, Grayscale took a different approach and chose to sue the SEC very forcefully. That day, Grayscale CEO Michael Sonnenshein said on social media: "We have filed a lawsuit against the U.S. Securities and Exchange Commission."

This year, Michael Sonnenshein once again expressed his determination and toughness to fight the SEC to the end. He expects that the lawsuit against the SEC's rejection of the Bitcoin spot ETF may be decided in the third quarter of this year, and he is mobilizing all resources to fight the US SEC legally. If the US regulatory authorities are still unwilling to recognize the legal status of Bitcoin ETF, Grayscale will not hesitate to take the case to the Supreme Court if necessary.

In order to realize the Bitcoin spot ETF, Grayscale took a clever move at this time and began to prepare for the issuance plan of ETH futures ETF. After receiving the regulatory warning from the SEC, Grayscale sent a letter to the Federal Court of Appeals to protest the SEC's differentiated treatment of Bitcoin ETF products. On July 12, according to an official announcement, Grayscale's lawyers have submitted a letter to the United States Court of Appeals for the District of Columbia Federal Circuit to protest the SEC's approval of the leveraged Bitcoin futures ETF while continuing to refuse to approve spot Bitcoin ETFs such as GBTC.

Grayscale argues that the SEC’s approval of a leveraged Bitcoin futures ETF provides more support for its legal argument that the SEC is acting in an arbitrary manner. Grayscale argues that there is no good reason to continue to refuse to approve spot products while allowing leveraged futures products to trade.

Grayscale also submitted a declaration to the SEC, stating that the SEC should approve all Bitcoin spot ETF applications at the same time to provide equal treatment to all applicants. Proposals to only approve listings "including Ark 21 Shares, Invesco Galaxy, iShares (BlackRock), Valkyrie, VanEck, WisdomTree and Wise Origin (Fidelity)" would reflect a positive "but sudden and significant change", Such a change would involve the Commission's application of relevant statutory standards and would therefore give an unfair discriminatory and prejudicial first-mover advantage to these proposals.

In past rejections of cryptocurrency spot ETFs, the SEC has expressed concerns that the spot market does not have enough liquidity or volume. These cryptocurrencies are traded on unregulated trading platforms, making them difficult to monitor, and market manipulation is also a long-standing problem in the spot market. Although the SEC has approved cryptocurrency futures ETFs, these ETFs are all on platforms supervised by U.S. financial regulators.

Back to this victorious lawsuit, on October 12 last year, Grayscale filed an opening brief on the SEC's rejection of its application for a spot Bitcoin exchange-traded fund. Grayscale General Counsel Craig Salm said that spot ETFs and futures ETFs "are no different in the context of Bitcoin" because "the pricing of CME Bitcoin futures is inherently lower than the spot Bitcoin market." The brief stated that the U.S. Securities and Exchange Commission failed to prove why there were completely different treatments for the approval of Bitcoin futures ETPs and spot Bitcoin ETPs, and therefore violated the most basic requirements of the U.S. Administrative Procedure Act.

Why is this a huge win?

Grayscale has remained optimistic throughout the lawsuit and recently stated that it is recruiting senior consultants for the ETF team to assist Grayscale's ETF team at all stages of the product life cycle, including product strategy, conception, listing and post-listing support.

A few weeks before the lawsuit verdict, Nathan Geraci, president of consulting firm The ETF Store, said that if the court trial results in Grayscale's favor, the key to the approval of the spot Bitcoin ETF will be how the SEC views the Coinbase monitoring sharing agreement proposed by the ETF listing trading platform. If there are no problems with either, it will undoubtedly promote the approval of the spot Bitcoin ETF.

Matthew Sigel, head of digital asset research at VanEck Fund Group, also expressed his views on the incident: "The SEC's policy on crypto ETFs has always been arbitrary. Now it is completely incoherent."

The outcome of this lawsuit also shows the court's attitude towards the SEC. According to court documents, a three-judge appeals panel in Washington overturned the SEC's decision to block the Grayscale ETF. The court said that "the rejection of Grayscale's proposal was arbitrary and capricious because the SEC failed to explain the different treatment of similar products."

Not only the courts, but Congress also seems to be unfriendly to the SEC in recent times. On June 12, U.S. Congressman Warren Davidson introduced the "SEC Stabilization Act" to the House of Representatives. One of the main provisions of the bill is to reorganize the U.S. SEC and dismiss SEC Chairman Gary Gensler.

The proposal was supported by another congressman, Tom Emmer. "American investors and the industry deserve clear and consistent oversight, not political games. The SEC Stability Act will bring common-sense reforms to ensure that the SEC's top priority is protecting the investors they are responsible for protecting, not catering to the whims of their reckless chairman," Tom Emmer said in a press release.

The SEC's fickleness has become a consensus among the U.S. legislature and the highest judicial body in the United States. Back to the outcome of the lawsuit, although Grayscale's victory in the lawsuit does not mean that GBTC can be freely converted into an ETF, "it has taken the conversion one step further."

Adam Cochran, partner at Cinneamhain Ventures, believes: "The full decision is a butchery of the SEC's arguments and requires a full review of Grayscale's application. From now on, the SEC's options are: delay the decision and come up with new fake reasons; give in and approve; request an appeal of the case."

"But given the reasoning of the court's ruling and the fact that they repeatedly pointed out the SEC's failure to support any of its arguments, a full appeal would be a terrible decision that would likely only annoy the court. So this is a huge win," Adam Cochran wrote on social media.

Although Grayscale’s victory in the lawsuit does not mean that GBTC will be freely converted into an ETF immediately, it does mean that the listing of the Bitcoin spot ETF is closer.

The ARK 21Shares BTC ETF, a collaboration between Ark Investment Management and 21Shares, has been seeking approval since 2021. So far this year, eight large financial institutions, including BlackRock, have submitted Bitcoin ETF applications to the U.S. SEC. Bitwise's application for a Bitcoin ETF came just one day after BlackRock's, and despite being rejected by the SEC for fraud and manipulation, Bitwise remained steadfast. Then, not to be outdone, WisdomTree resubmitted its application for the WisdomTree BTC Trust. Although both applications were unsuccessful, they still hope to keep investors informed of BTC's price movements. Finally, Fidelity Investments also joined the ranks of BTC ETFs.

Data shows that as of August 20, at least 16 Ethereum-related ETF applications are awaiting regulatory approval, and these companies have not withdrawn their applications. The SEC has a total of 240 days to make a decision on the application after it begins its review, and the first deadline for the next batch of ETF applications is September 2, and Bitcoin ETFs will usher in intensive approvals. The SEC is expected to respond to Bitcoin ETF application files submitted by Bitwise, BlackRock, VanEck, WisdomTree, and Invesco on September 2. Bitwise's application will be considered by Friday, and other applications will be considered the next day, so the SEC may weigh in before the weekend. At the same time, application responses were made to Valkyrie and Globle X on September 4 and October 10, respectively.

Market manipulation, liquidity, and the inherent volatility of crypto assets are among the reasons why regulators such as the SEC have remained cautious. For this reason, the SEC rejected the applications of Ark Investment Management and 21Shares, but Ark CEO Cathie Wood speculated that the SEC would approve multiple ETFs at the same time, and success would depend mainly on marketing capabilities and effective communication.

Obviously, once the Bitcoin spot ETF is officially listed in the United States, it will become a milestone event in the global blockchain field, because it means that the US regulatory authorities have legally recognized the legal status of Bitcoin as a financial product, and Bitcoin will gain unprecedented influence.

The biggest beneficiary of the concentrated benefits may be the DCG empire behind GBTC

Barry Silbert founded DCG in 2015 and subsequently built the "DCG Empire" by investing in hundreds of projects and companies. The most important company in the DCG portfolio is Grayscale Investments, which currently holds approximately 623,000 bitcoins.

Due to the complexity of compliance and transactions, it is difficult for institutional investors to directly hold BTC, and for individual investors, the trading and storage of cryptocurrencies have a certain learning threshold. The Bitcoin Trust Fund GBTC managed by Grayscale Investments has helped solve this problem to a large extent. Therefore, many institutions use the product structure of GBTC to participate in the premium arbitrage movement.

BlockBeats Note: When shares of the Grayscale Bitcoin Trust change hands at a premium to the underlying Bitcoin price, GBTC is trading at a premium. Conversely, if GBTC shares trade below net asset value, it is considered trading at a discount (negative premium).

GBTC tracks the price of Bitcoin but is not completely consistent with it. Its premium rate has always been one of the important indicators in the cryptocurrency market. Before the crypto market completely turned bearish, GBTC's negative premium trend seemed to become irreversible. In order to change the trust to a spot Bitcoin ETF and correct the "discount" of GBTC, Grayscale has been pushing GBTC to be converted into a Bitcoin spot ETF, but the three applications were ruthlessly rejected by the SEC.

During the peak of the 2020-2021 bull market, the value of GBTC shares exceeded the value of the underlying Bitcoin. Many people believe that it was Grayscale's GBTC that drove the last bull market cycle.

However, GBTC has been in a negative premium state since the end of February 2021. With the collapse of CeFi institutions such as Celsius, Three Arrows and FTX, the arbitrage opportunities for transfers and GBTC have gradually disappeared, and GBTC has also experienced an unprecedented "big discount". After entering the bear market in 2022, the ratio continued to expand. The continued negative premium of GBTC was once considered to have dragged down the development of the DGC empire.

However, as the litigation process between Grayscale and the SEC gradually became clear, in March this year, Bloomberg senior ETF analyst Eric Balchunas and senior legal analyst Elliott Z Stein published an article stating that Grayscale's chance of winning the lawsuit increased to 70%. Many well-known investors are optimistic about the future development of GBTC. Cathie Wood has repeatedly praised the future growth of GBTC and looks forward to a return to a positive premium. ARK Investment, which she manages, is the largest holder of GBTC. As more and more investment institutions in the market are also optimistic about Grayscale's chance of winning this year, the negative premium of GBTC has gradually stabilized.

Since mid-June, BlackRock, one of the world's largest asset management groups, has submitted a filing application for a spot Bitcoin ETF to the U.S. SEC through its subsidiary iShares, which has attracted great attention from the market. Several traditional financial giants have also followed BlackRock in applying for ETFs. GBTC's daily trading volume has continued to soar and exceeded US$183 million on July 13, setting a new high for the year.

Grayscale CEO Michael Sonnenshein said at the CoinDesk 2023 Consensus Conference in April that the company may know the results of whether it can convert $17.5 billion worth of GBTC into a spot Bitcoin ETF by the end of the third quarter of this year. As the final verdict is getting closer, the sentiment of GBTC's rise has long existed. Now that Grayscale has won the lawsuit against the SEC, it is like adding more firewood to the fire. After Grayscale won the lawsuit against the SEC, GBTC's negative premium rate quickly responded positively.

According to the latest data from Coinglass, the current total holdings of the Grayscale Fund are approximately US$16.3 billion. The negative premium of GBTC has narrowed from 25% yesterday to 17%, and the negative premium is still narrowing, recovering about 31.62% from the highest negative premium rate in December 2022 (when the negative premium reached 48.62%).

What’s more interesting is that this morning, DCG reached a preliminary agreement with Genesis’ creditors. The agreement includes that unsecured creditors can receive a recovery amount equivalent to 70% to 90% of the US dollar value, and can recover 65% to 90% in kind, depending on the face value of digital assets. Pending court approval, DCG expects to inject more than $1 billion in new debt financing into Genesis.

DCG subsidiary Genesis suffered a severe financial blow after the collapse of cryptocurrency hedge funds Three Arrows Capital and FTX last year. In January this year, Genesis filed for Chapter 11 bankruptcy protection in the New York Federal Bankruptcy Court.

Now DCG aims to clear existing debt, including about $630 million in unsecured loans due in May 2023 and $1.1 billion in promissory notes due in 2032. According to the filing, its repayment plan is divided into two parts: one part involves $328 million due in two years, and the other part involves $830 million due in seven years. In addition, DCG has also promised to pay four installments totaling $275 million to pay for the loan due in May 2023.

Considering that Grayscale won the lawsuit against the SEC about a day ago, DCG's move is very meaningful. What is certain is that as the possibility of GBTC turning into a Bitcoin spot ETF increases, the DCG empire behind GBTC also has new hope.