GBTC Discount Narrows by Over 42% as Grayscale-SEC Face Off Inches Closer

At the center of the Grayscale-SEC drama is Grayscale Bitcoin Trust (GBTC) – the world’s largest Bitcoin fund – which has for two years been trading at a steep discount to the crypto-asset it holds. This has caused much pain in the market.

But on the days leading up to the much-anticipated fight, the GBTC discount to net asset value has slightly narrowed to 42%

Grayscale and SEC Face Off

According to data from YCharts, the GBTC discount has been slightly reduced to 42.11%. The figure hit 47.35% on February 13th. The narrowing could potentially reflect the investor mindset of the lawsuit ending in Grayscale’s favor.

The company filed to convert GBTC into an exchange-traded fund (ETF) with the SEC in October 2021. The regulator has approved multiple futures-backed crypto products but repeatedly dismissed spot ones.

Grayscale decided to sue the SEC last summer, just hours after the regulatory agency rejected the asset manager’s conversion plans. The firm’s flagship, Bitcoin Trust, launched in 2013 and holds $14.8 billion in assets.

It has traded at a significant discount which prompted Grayscale to come up with a solution that involves converting it into an ETF. The firm expects that such a move would reduce GBTC’s discount by introducing liquidity.

According to the filing with the US Court of Appeals for the District of Columbia Circuit, Grayscale argued that the SEC failed “to apply consistent treatment to similar investment vehicles” considering the fact that futures-backed Bitcoin ETFs exist. The agency, on the other hand, continued to maintain that Bitcoin futures funds and spot ones are different and that they have “fundamental differences in the ability to detect and deter fraud and manipulation.”

However, Donald Verrilli Jr., a former US solicitor general who Grayscale onboarded as a legal strategist, believes the exact same protections exist in the spot market ETFs. In a recent interview, Verilli explained,

“And it’s just a classic case of taking like cases and treating them differently. And it really comes through when you lay it side by side. The order that the SEC issued approving a Bitcoin futures ETF, and the order in our case disapproving our spot ETF… they just contradict each other.”

An Uphill Battle

The fight with the SEC is an “uphill battle” for Grayscale, according to Elliott Stein, senior litigation analyst with Bloomberg Intelligence. He explained that the Commission has articulated a standard for approving Bitcoin-based ETFs that Stein says should pass the “arbitrary and capricious” test centering around “does the exchange have a surveillance agreement with a regulated market of significant size, making fraud less of a concern.”

The agency has pointed to all the failed crypto exchanges, especially FTX, and the controls that these entities had for consumer protection to make its point.

Bloomberg Intelligence believes Grayscale has a 40% chance of winning. If the asset manager scores a win, it could open the floodgates to a massive wall of institutional money and unlock billions of dollars in value for GBTC investors.