The Breakdown - BREAKING: Grayscale Wins Lawsuit Against SEC!

Episode Date: August 29, 2023

A DC Circuit Court has decided in favor of Grayscale in their lawsuit against the SEC, calling the decision to deny GBTC's conversion to a Bitcoin Spot ETF "arbitrary and capricious."  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. Welcome back to a special late-breaking episode of The Breakdown. Today we received a decision which the crypto industry has been waiting for with absolutely baited breath. At 1023 this morning, Fox business reporter Eleanor Territ tweeted, Breaking, a DC court of appeals has granted Grayscale's petition for review to convert its grayscale Bitcoin trust into a spot Bitcoin ETF and has ordered the SEC's order to be vacated.

So what we're going to do today is break down what this case was about, the background and how it came to be, the immediate reactions from the community, the specifics of the decision, the immediate reactions of the community, and what happens next? To understand the context, let's actually go back in time a little bit all the way to last June, June 7th, 2022. On that day, Grayscale tweeted, as we enter the final month. before a response is due on our application to convert Grayscale Bitcoin Trust into an ETF, we have retained Donald B. Varelli Jr., former Solicitor General of the United States,

as additional legal counsel. Grayscale continued, we want to ensure that we have the strongest possible team of legal minds ready to support our Bitcoin ETF application. Verilli will serve as senior legal strategist. He is one of the nation's most experienced attorneys with a deep understanding of legal theory, administrative procedure, and the practical matters of working with the judiciary branch. Over the course of his career, he has argued more than 50 cases with the United States Supreme Court, including several that dealt directly with Administrative Procedure Act violations. Now, basically, what was going on is that Grayscale had filed for the ability to convert their trust into an ETF. This was their chosen way to resolve what was a huge problem

at the time and what has continued to be a problem, which is the discount to net asset value that GBT was trading at. What that means is that the value of GBT shares was less than the value of of the underlying Bitcoin held within them, that made holders of the shares underwater, and since so many people were effectively using GPTC as a proxy Bitcoin ETF, it meant that a lot of investors were simply stuck in this asset that they didn't want to be in anymore, without a lot of recourse. Now, even back in June, it was clear that Grayscale was anticipating that their proposal to convert the trust into a Bitcoin ETF was going to be denied. Blockchain Association Chief Policy Officer Jake Trevinsky said as much, quote tweeting that Grayscale tweet I just read and

saying, strong move, grayscale means business. The SEC's deadline to approve or deny the application to convert GBT to an ETF is July 6th. No doubt it should be approved. I don't see how the SEC survives a legal challenge if not, especially one led by Don Verilli. Mark your calendar. Well, of course, July 6th came and went, and the application was indeed denied. There were some at the time, even all the way back then, who were saying that the crypto industry needed to avail themselves of the legal system more. On March 9th, 2022, Johnny Deaton, the founder of Crypto Law U.S. said, I've questioned why no one has sued over the denial of a Bitcoin spot ETF.

Former SEC Commissioner Grunfest is dumbfounded by this as well. He said the denial is arbitrary and capricious, indefensible, and the SEC would lose. Well, in October last year, Grayscale finally did exactly that and filed a lawsuit against the SEC. The lawsuit called the spot ETF rejection arbitrary, capricious, and discriminatory. Now, at core to Grayscale's argument was the inconsistent. of approving a Bitcoin futures ETF, or at this point numerous Bitcoin futures ETFs, but not approving a Bitcoin spot ETF. The SEC had said its concerns were around market manipulation,

but as Grayscale pointed out, the spot ETFs that had been approved and denied were using the same price feeds that fed the Bitcoin futures ETF. Presumably, if it comes to market manipulation, the issue is, of course, the price feeds themselves, and more specifically the exchanges where the data of those prices comes from. How then, could you? could you approve a Bitcoin Futures ETF that references the same price feed as a spot ETF and say that somehow there was more of a risk of market manipulation with the spot ETF even though it was the same underlying price feed. Now, in March of this year, it seemed like Grayscale was getting some traction with those

arguments. On March 7th, Coin Desk published a piece, judges expressed skepticism of SEC arguments in Grayscale Bitcoin ETF hearing. In what will be a relevant question as we see in a minute, Judge Naomi Rao asked, it seems to me that what the commission really needs to explain is how it understands the relationship between Bitcoin futures and the spot price of Bitcoin. It seems to me that one is just essentially a derivative. They move together 99.9% of the time. So where's the gap in the commission's view? Now, at the time the market started to get the sense that given the judge's questioning that day,

the case might be moving towards a positive resolution for grayscale and the crypto industry at large. Of course, the next thing had happened a few months later was the absolute flurry of Bitcoin ETFs. This was kicked off, most notably by BlackRock, who have been successful in 572 out of 573 ETF proposals that they've had or something like that, but included a huge number of other players who updated and refiled their applications, seeming to think that BlackRock knew something that everyone else didn't. One of the updates was that Coinbase would be specifically tasked with providing market surveillance for the proposed funds, and it appeared that those ETF issuers hoped that that surveillance sharing agreement would be sufficient for the SEC to finally

reverse their decision and move on. Of course, a lot of discussions subsequent to these filings has been around the relationship between an anticipated win for Grayscale on the courts and the success of a future Bitcoin ETF filing. Well, this morning, as we said, Grayscale won. As Michael Sean Insign, signed, the CEO of Grayscale said, the D.C. Circuit ruled in favor of Grayscale in our lawsuit challenging the SEC's decision to deny GPTC's conversion to an ETF. The response. The response from the industry was immediate. Rodrigo, who does legal and policy at paradigm writes, the great thing about the American political system is that it's designed to curtail administrative overreach. In the face of an intransigent SEC, the courts will ensure

crypto has a future in the U.S. Brown-Rudnik partner Stephen Paley writes, the D.C. Circuit Court of Appeals holds that the SEC acted in an arbitrary and capricious way in denying Grayscale's proposed Bitcoin fund. This is a hard standard to meet. It's the court telling the SEC that it had no basis for the decision and just made it up. Now, looking at the decision specifically, Judge Rao wrote, it is a fundamental principle of administrative law that agencies must treat like cases alike. The securities and exchange commission recently approved the trading of two Bitcoin futures funds on national exchanges, but denied approval of Grayscale's Bitcoin Fund. Petitioning for review of the commission's denial order, Grayscale maintains its

proposed Bitcoin exchange traded product, is materially similar to Bitcoin futures exchange traded products and should have been approved to trade on NYSE ARCA. We agree. The denial of Grayscale's proposal was arbitrary and capricious because the commission failed to explain its different treatment of similar products. We therefore grant Grayscale's petition and vacate the order. Now, one of the things that people noted is that the court kind of didn't pull any punches when it came to telling the SEC why they were wrong. As Nick Carter summed up, the D.C. Circuit court just called the SEC utter casuals and told them to get good, adding skill issue to you. The relevant section of the decision, the Commission neither disputed Grayscale's evidence that the

spot in futures markets for Bitcoin are 99.9% correlated, nor suggested that market inefficiencies or other factors would undermine the correlation. The Commission faults Grayscale for failing to provide other types of evidence. Without further explanation, however, the Commission's assertion that, quote, information in the record for this filing does not support the claim that any fraud or manipulation in the underlying spot market will affect both products in the same way is unreasonable. And here's the real money shot. Quote, the commission's unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets fall short of the standard for reasoned decision making. From a previous court decision, it would be presumably

arbitrary and capricious to ignore an obvious fact. So what does this not mean? And this is really important. This does not mean that grayscale Bitcoin trust will be automatically converting into an ETF. Now, I think most people in the crypto industry aren't getting this wrong, but a lot of people who are passably observing, and a lot of people who are perhaps on the fringes in this industry and not paying tons of attention to it might be getting that information from headlines that are, if not outright wrong, at least a little bit vague. What this means is that Grayscale's petition needs to be reconsidered alongside the other ETFs once again, and that the SEC's reasoning that they provided, at least in this case, would not stand. Now, what this also doesn't mean is that the same. It's a lot of the SEC's reasoning,

that a Bitcoin ETF is guaranteed. The court ruled that in this particular case, the SEC's reasoning was arbitrary and capricious. Not that there is no way for an ETF to be sensibly denied by the SEC, just that the way they denied this one wasn't it. Jay Chavinsky once again did a good sum-up threat of this. He writes, Grayscale's victory over the SEC is massive. It's very rare for a federal circuit court to find that an agency has violated the APA by acting arbitrarily and capriciously. The DC Circuit just delivered a huge embarrassment for the SEC, but the ETF isn't approved yet. The D.C. Circuit Court soundly rejected the SEC's view that Grayscale's ETF proposal was not, quote, designed to prevent fraudulent and manipulative acts and practices. The SEC has spent a full decade denying spot

Bitcoin ETF proposals under this reasoning. That era has now come to an end. But the court didn't order the SEC to approve Grayscale's ETF proposal. It just said that the SEC's analysis on the fraud and manipulation issue was wrong. Now the SEC has to go back and review Grayscale's proposal again, with the court's ruling in mind. What will the SEC do? One theory is that the SEC will just pick a different reason to deny Grayscale's proposal and force more long and costly litigation. That's possible. It's hard to understate the extreme hostility of SEC leadership towards crypto. Will Cher Gensler really accept this loss? But another theory is that the SEC will take the D.C. Circuit's decision as a semi-graceful exit from their anti-ETF position. I'm in this camp.

It's the right move. We disagree, but we're following the rule of law is a convenient. convenient excuse to back out of a losing battle. There will be political pressure on the SEC to approve spot Bitcoin ETFs. This isn't just about grayscale. All of Tradfi is ready for a Bitcoin ETF. Many other issuers have proposed ETFs this year, including BlackRock, and Larry Fink throws heavy punches in D.C. Chair Gensler can also spin up a face-saving narrative out of a spot Bitcoin ETF approval. The SEC has been getting blasted for its regulation by enforcement approach to crypto. Here's a chance to say, look, we aren't anti-crypto. We're willing to approve the right products. I have no doubt that we'll get a spot Bitcoin ETF sooner or later. The only question

is if the SEC wants to make it more painful for itself. Trust me, if there's another denial, there will be another lawsuit. I strongly recommend the SEC picks sooner. So that we will call the sophisticated nuance, complex correct analysis. But for the sake of completeness, we also have to look over at Scoopy, who tweets the mid-twit meme with the agonized crying guy in the middle of the bell curve saying, it's not a victory. It's only a middle step in getting the SEC to review their ETF application and the genius on the moron in either side of the bell curve saying gray scale one send it and send it the markets did bitcoin jumped about a thousand dollars or three point eight percent in the moments after the announcement at the time of recording bitcoin was actually up

about five percent and gptc was up even more up about 17 percent what's more as rich rosenblum from gsr points out while this gray scale news may have been the catalyst quote chartis would argue the Bitcoin pop was overdue as fresh shorts got exhausted at the bottom of the recent range and capitulated. Now, when it comes to what's next, there are still a lot of people who are GBTC holders, who are in a semi-battle with Grayscale, trying to force them to redeem. David Bailey, the CEO of Bitcoin Magazine writes, our number one goal with Redeem GPTC is to reduce the discount to nav and bring relief for investors. Today's decision is an initial victory for shareholders, but we will not stop our efforts until the discount is eliminated. We now need next steps in a firm

timeline from Grayscale. Ryan Selkis from Masari echoes this, but puts it in more political terms. He writes, Never forget, the U.S. courts protected retail investors while the SEC held them hostage and hurt them to the tune of billions of dollars. The SEC is an illegitimate institution with a corrupt leader. It took the courts to rule that the SEC stick to its mission and rules. Selkis also tweeted, now is a perfect time to remind the president that his absolute chump of an SEC chair, Gary Gensler, is losing him votes and embarrassing him in court. Corrupt. inept and embarrassing is no way to run a financial regulator.

Now, unless you think this is just tough talk from someone on Twitter, Selkis and many others in the crypto industry are determined to make crypto a losing political issue for people on the other side in this coming election cycle. And while the industry may be down right now, there is still a lot of capital and appetite to bring that fight to the elected politicians. Caitlin Long writes, still shocked at how Biden administration's hatred of anything crypto drove it to poor judgment, now boomeranging back to, on it in courts. Better to have worked with law-abiding players. This was their choice. Courts curbing

federal agency's power impacts far more than crypto. I think what's clear is that opposing the Bitcoin spot ETF at this point is just a losing issue. Even Cass Piancy, who is a co-host of the Crypto Critics Pod, which admittedly, I think, is one of the more good faith and thoughtful critiques of the industry, tweets, skeptics and critics are not going to like me saying this, but I believe the gray scale ETF will be approved. I also see no real issue with the spot Bitcoin ETF. But at the end of the day, when it comes to what to feel right now and what the industry is feeling, Anthony Zasano nails it when he writes the ETF promised land awaits us, friends. Just try not to blow yourselves up doing something stupid before the party really gets going next year.

And maybe the best summary comes from Will Clemente, who writes, this is one of the biggest days for Bitcoin in its history. We are so effing back. That is going to do it for today's breakdown. Until tomorrow, be safe and save some change for the Bitcoin ETF. Peace.