Grayscale has a 40% chance to win vs SEC

by Arthur · March 7, 2023

Michael Sonnenshein, CEO of Grayscale Investments, a subsidiary of Digital Currency Group. Fortune

This one is for all the balls. Grayscale, the manager of a trust that owns more than 3% of the world’s Bitcoin, is going before three judges in Washington, DC on Tuesday to argue that the Securities and Exchange Commission wrongly denied its application to convert the trust into an ETF.

If the company loses, it will see the price of the trust’s shares – which are already trading more than 40% below the price of their underlying Bitcoin – fall further, posing an existential event for Grayscale and its parent company DCG. But if Grayscale wins, the company and Bitcoin itself will get a big boost, knocking SEC chair Gary Gensler on his heels at a time when he’s waging a scorched-earth battle against crypto.

According to Bloomberg Intelligence, Grayscale has a 40% chance of winning. It more or less agrees with what I have heard from several lawyers who have no dog in this fight. The reason has to do with a principle of administrative law that says, in judge-speak, that agencies like the SEC cannot act “arbitrarily and capriciously” when it comes to making decisions.

Grayscale argues that this is precisely how the SEC behaved when it rejected the ETF petition. And frankly, the company is right. If you’re not familiar, Grayscale created its trust way back in 2013 when Bitcoin was much smaller and harder to buy, especially if you were an institution. This soon allowed anyone to buy Bitcoin in the form of shares on the OTC market with Grayscale charging a stiff 2% annual fee – an arrangement that was an expensive, jerry-rigged solution but served its purpose in an earlier era of crypto .

Grayscale itself has tacitly acknowledged that buying shares in a trust to hold Bitcoin is an outdated model, and in recent years has asked the SEC to convert the trust into an ETF. ETFs are a safe, affordable and very common way to hold assets such as gold or a stock market index, and regulators in Canada and Europe have already approved successful crypto ETFs. The SEC, on the other hand, continues to reject petitions to create the same in the US on the outlandish grounds that a crypto ETF could somehow be manipulated – a highly unlikely argument given that Bitcoin is diffusely held across the globe with a market capitalization of almost half a billion dollars. Meanwhile, the agency has agreed to bless a Bitcoin futures ETF, a much more complicated and costly product.

The SEC chief’s decision to deny the Grayscale ETF is, well, arbitrary and capricious — especially given his broader recent assault on all things crypto-related. And the SEC is particularly vulnerable to a legal setback in light of a recent Supreme Court decision that reduced the deference judges must show to specialized agencies.

The long and short of it is Grayscale has the better legal argument. So why are the odds only 40% the company will win? Well, first, consider recent events. The financial carnage caused by Sam Bankman-Fried’s massive fraud and other scams means that anything related to crypto is radioactive in many people’s eyes. It also doesn’t help that most judges are in their 60s or older, and aren’t known for keeping up with blockchain or other new technology. Put it together and there is a good chance for the three judges to decide Grayscale v. SEC are predisposed to view the company with suspicion.

Still, 40% is pretty close to a jump ball. So don’t be surprised if the court’s ruling, due by the end of the summer, favors Grayscale.

Jeff John Roberts
[email protected]
@jeffjohnroberts

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