Grayscale CEO Calls on SEC to Protect Investors

Grayscale Investments' CEO Michael Sonnenshein has called on the United States Securities and Exchange Commission (SEC) to protect Grayscale investors by returning the true asset value to them. In a recent interview on the popular podcast "What Bitcoin Did" hosted by Peter McCormack, Sonnenshein stated that he "can't imagine" why the SEC "wouldn't want" to protect Grayscale investors by approving the Grayscale Bitcoin Trust (GBTC) as a spot Bitcoin exchange-traded fund (ETF).

Sonnenshein explained that the SEC acted arbitrarily by denying approval for GBTC to be a spot Bitcoin ETF while approving Bitcoin Futures ETFs. He added that the SEC violated the administrative procedures act, which ensures that the regulator doesn't show "favoritism" or act "arbitrarily." According to Sonnenshein, Grayscale is currently suing the SEC over the denial of its initial application, and a decision on the case could be reached by fall 2023.

If GBTC were approved as a spot Bitcoin ETF, there is a "couple billion dollars" of capital that would immediately go back into investors' pockets, on an "overnight basis," as the fund would "bleed back" up to its net asset value (NAV). Sonnenshein explained that this is due to GBTC currently trading at a discount to its NAV, but if it were to convert to an ETF, there would be an "arbitraged mechanism" embedded, and there would no longer be a discount or a premium.

Grayscale has over a million investor accounts, with investors worldwide counting on the firm to "do the right thing for them." Sonnenshein "can't imagine" why the SEC wouldn't want to "protect investors" and "return that value" to them. He added that Grayscale isn't going "to shy" away from the fact that it has a "commercial interest" in this approval.

This comes after the SEC filed a 73-page brief with the U.S. Court of Appeals for the District of Columbia in December 2022, outlining its reasons for denying Grayscale's request to convert its $12 billion Bitcoin Trust into a spot-based Bitcoin ETF in June 2022. The SEC based its decision on findings that Grayscale's proposal did not sufficiently protect against fraud and manipulation. The agency had made similar findings in several earlier applications to create spot-based Bitcoin ETFs.

Grayscale is a digital currency investment firm that offers a range of investment products, including the Grayscale Bitcoin Trust, which is designed to provide investors with exposure to the price of Bitcoin without the challenges of buying, storing, and safekeeping Bitcoin directly. The trust is listed on the OTCQX market and is available to both accredited and non-accredited investors. GBTC was launched in 2013, and as of January 2022, it held over $30 billion in assets under management. Grayscale's Bitcoin Trust is one of the most popular ways for investors to gain exposure to Bitcoin, and the firm has been at the forefront of the movement to bring Bitcoin to the mainstream.

The SEC has been hesitant to approve Bitcoin ETFs, citing concerns about fraud, manipulation, and the lack of regulation in the cryptocurrency market. In the past, the SEC has rejected several proposals for Bitcoin ETFs, citing concerns about market manipulation and insufficient investor protection. However, the agency has recently shown a more favorable attitude toward Bitcoin, with several Bitcoin Futures ETFs receiving approval.

In the case of Grayscale's GBTC, the SEC has raised concerns about the trust's structure and the potential for market manipulation. Grayscale's proposal to convert GBTC into a spot-based Bitcoin ETF was denied in June 2022, with the SEC citing concerns about the lack of regulation in the Bitcoin market and the potential for market manipulation.

Grayscale has challenged the SEC's decision, arguing that the agency acted arbitrarily and violated the administrative procedures act. Grayscale's CEO, Michael Sonnenshein, has been vocal in his criticism of the SEC's decision, arguing that it has hurt investors by preventing them from realizing the true value of their investment in GBTC.

The case is currently making its way through the U.S. Court of Appeals for the District of Columbia, and a decision is expected by fall 2023. If Grayscale is successful in its challenge, it could pave the way for other Bitcoin ETFs to be approved, opening up a new avenue for investors to gain exposure to Bitcoin.

Overall, the Grayscale-SEC dispute highlights the challenges facing regulators as they try to balance investor protection with the need to foster innovation in the cryptocurrency market. As the market for digital assets continues to grow, it is likely that we will see more clashes between regulators and industry participants as they try to navigate this rapidly evolving landscape.