What will the upcoming Grayscale-SEC Court ruling bring?

Written by Ben Strack, blockworks Translation: Good Oba, Golden Finance

In Grayscale's victory with the U.S. Securities and Exchange Commission (SEC), the final judgment of the Court of Appeals for the Washington D.C. Circuit may send some clear message to those waiting for spot bitcoin ETFs. Nor is it true.

One lawyer noted that the judge's wording would be important because the court could limit the SEC's rejection of the conversion of the Grayscale Bitcoin Trust (GBTC) into ETFs. Despite the SEC's decision not to challenge the court ruling, there are still many who believe it could take weeks or even months for a Bitcoin ETF to go public. The opportunity for the U.S. Securities and Exchange Commission (SEC) to request a reconsideration passed on October 13. A Grayscale spokesperson said in a statement that the Washington, D.C. Circuit Court of Appeals will now issue a "final authorization" within 7 days of that date. Under federal rules for appeals procedures, courts can extend the time to issue authorizations. Because the SEC's window for a rehearing expired late Friday, the court's order may not be issued until Monday. The Grayscale team stands ready to convert GBTC into an ETF upon SEC approval.

Final ruling and what it may mean

As Grayscale and the industry await a final court order, one thing seems clear: According to Arie Heijkoop, a partner at law firm Haynes Boone, the court will order the SEC to reconsider its decision to reject GBTC conversion to ETFs. However, the details and scope of the court order, as well as the SEC's upcoming response, remain unclear.

I don't expect the court order to require the SEC to approve the application, as the court may want to preserve some policy leeway in case the SEC finds other valid grounds to deny the application, industry insiders said.

The regulator did not raise other major concerns, such as custody issues, in previous spot Bitcoin ETF rejections or responses to Grayscale's legitimate filings. So if the SEC again denies the GBTC application on new grounds, it may be challenged by the applicant and future courts. We will wait and see if the court will use language in the order to effectively limit the SEC's continued denial, such as making it clear that any such grounds must be based on factors that do not apply to Bitcoin futures. In an August ruling, the Washington D.C. Circuit Judge said the SEC allowed bitcoin futures ETFs but prevented GBTC from converting to ETFs "arbitrarily and arbitrarily."

On Thursday, Grayscale filed a Form S-3 with the SEC as part of continued efforts to convert GBTC into ETFs. A person familiar with the matter called the document a "procedural milestone" for the company to begin a conversation with another SEC division after the litigation ended. In an X thread on Wednesday, Scott Johnsson, an associate at the law firm Davis Polk & Wardwell, pondered whether a new 19b-4 filing was needed. He noted that if the SEC did not issue an order against it, 19b-4 is considered approved. In addition, he noted that the appeals court will reverse the SEC's veto.

19b-4 file

The NYSE Arca Exchange will be the exchange on which the GBTC ETF will be listed, but has not yet refiled its 19b-4 filing. Grayscale acknowledged Thursday that the GBTC conversion requires SEC approval of 19b-4 filings.

In Wednesday's Theme X, Davis Polk & Wardwell attorney Scott Johnsson pondered whether a new 19b-4 needed to be filed. He noted that 19b-4 is considered approved if the SEC does not issue an order. In addition, he noted that the appeals court would drop the SEC's objection. Grayscale could use this as a bargaining chip with the SEC, which may require the company to refile its 19b-4 filing, and I don't think the power of attorney issued Friday by the Washington D.C. Circuit will provide much clarity. But it should be interesting to see if and when the GBTC will resubmit. Resubmission is likely to be the path with the least resistance.

Beyond GBTC

The SEC chairman declined to comment in an interview Wednesday on the regulator's decision not to appeal Grayscale's court victory. He acknowledged that its staff is actively reviewing applications for nearly a dozen spot Bitcoin ETFs. The SEC's disclosure review team provides feedback to potential issuers, but he declined to comment on such conversations. In fact, in recent days, issuers have updated their application documents for bitcoin ETFs to provide more information, which executives and market watchers say could be a sign of a productive dialogue between the company and regulators.

It now seems more likely that the SEC has changed its stance and is no longer trying to articulate new reasons for rejecting spot Bitcoin ETFs, but is watching the imminent approval of this application, as well as the possible approval of numerous other spot Bitcoin ETFs.

The SEC has until Jan. 10 next year to decide whether to approve the spot bitcoin ETF of Ark Invest and 21Shares. The regulator has until mid-March next year deciding whether to approve a range of other similar proposals, including those presented by BlackRock and Fidelity. The SEC is expected to approve applications for spot bitcoin, which could include Grayscale, as early as the end of the year, but more likely in early to mid-2024.