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Ripple Supreme Court Showdown: Pro-Crypto Lawyer Weighs in On SEC Lawsuit & Grayscale ETF Conversion

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Pro-crypto lawyer John Deaton took to Twitter to weigh in on the ongoing legal battle between Grayscale and the SEC over the conversion of Grayscale Bitcoin Trust (GBTC) into a Bitcoin exchange-traded fund (ETF). Deaton also commented on the SEC’s lawsuit against Ripple Labs, suggesting that it could also make its way to the U.S. Supreme Court.

Deaton stated that he believes the odds of a Grayscale win before the D.C. Circuit are 50/50 and a win before the Supreme Court are 75-80%. He argued that under the law, the SEC’s denial of a spot BTC ETF while allowing both a futures ETF and a short ETF is arbitrary and capricious.

He also commented on the SEC’s case against Ripple Labs, stating that he has “zero doubt that the current makeup of the U.S. Supreme Court will rule in favor of Ripple if it goes that far.” Deaton argues that the SEC went too far in its allegations against Ripple and that the case rests on “demonstrably false premises.”

Dave Weisberger, CEO of CoinRoutes, also weighed in on the discussion, stating that the SEC’s case is based on false premises and ignores precedent set by approved gold spot ETFs, while the Bitcoin spot is more transparent and liquid. He also argued that the availability of GBTC for purchase in brokerage accounts harms investors directly, against the SEC’s mandate.

Latest Update On Ripple Lawsuit

In a recent development in the ongoing legal battle between Ripple and the SEC, an investment banker declarant, who is an employee of an SEC-regulated entity, has filed a response to Ripple’s opposition to an earlier motion to keep his name, position, and employer private. 

The response, which was submitted by the investment banker’s legal representatives, points out that the declarant submitted his statement to the SEC “voluntarily,” but in reality, the options presented to him were to provide a declaration or to testify. 

The investment banker’s firm is an SEC-registered broker-dealer, and, as such, the declarant had no choice but to comply with the request from the SEC. The document, which was attached to James K. Filan’s tweet, stated:

Where a witness’s only options are to provide a declaration or to testify, there is no truly voluntary choice to be made.

Related Reading | Bitcoin (BTC) Market Sentiment Flips: Risk Reversals Show Bullish Shift

Grayscale CEO Believes SEC Leashing Crypto Hampers Its Growth

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Undoubtedly, US regulators have taken steps to safeguard bitcoin investors. But lately, a lot of red flags have been raised by neighborhood residents. There were rumors that something “huge” would be announced when the Department of Justice first said it would “announce a major, international cryptocurrency enforcement action.”

That wasn’t the case, though. Community members were incensed by the government’s action against the less well-known cryptocurrency exchange Bitzlato. In fact, some openly questioned whether the most recent event was intended to divert attention from the fact that they had no reason to suspect anything about FTX.

Grayscale CEO Highlights SEC’s Regulation Repercussions

Even established members of the group began sharing their perspectives about the matter, apart from the community. Grayscale executive Michael Sonnenshein criticized the SEC’s “one-dimensional approach of regulation by enforcement” in a letter to the Wall Street Journal.

He agreed with the claim that the SEC had been “late to the game” when it came to regulating the cryptocurrency market. The CEO of Grayscale also stated that the SEC should “certainly try” to get rid of dishonest people. However, he emphasized that it shouldn’t be done “at the expense of efforts to develop appropriate regulation.”

Outlining the effects and demonstrating how it has impeded the industry’s expansion, he remarked,

“The SEC’s inaction has prevented Bitcoin’s advancement into the US regulatory perimeter, often forcing U.S investors offshore with less protection and oversight… We are seeing the consequences of the SEC’s priorities play out in real-time—at the expense of U.S. investors.” 

Grayscale filed a lawsuit against the SEC in the middle of 2022 after it rejected its request to convert its Bitcoin trust into a spot-based Exchange Traded Fund.

Grayscale submitted documents to the SEC in October of last year in order to turn its Bitcoin Trust into an ETF. Following several extensions, the regulatory agency on Wednesday issued a rejection decision. Likewise, Grayscale’s application did not address the regulator’s concerns regarding how it would guard against market manipulation and safeguard the interests of investors and the general public.

Grayscale decided to quickly traverse legal waters when the rejection order was issued. The CEO of Grayscale, Michael Sonnenshein, announced on Twitter that a lawsuit had been filed to contest the SEC’s judgment.

Bitcoin ETF Rejection: Grayscale Submits Response Brief in Appeal Against SEC 

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Grayscale has submitted a response brief in its appeal against the US Securities and Exchange Commission’s (SEC) rejection of its proposal to transform its $12 billion Grayscale Bitcoin Trust (GBTC) into a Bitcoin ETF that is based on spot prices. 

The brief, which was filed in the District of Columbia Circuit Court, refutes the points made in the SEC’s December response brief and reiterates Grayscale’s original arguments.

GBTC Conversion To A Spot Bitcoin ETF

Grayscale’s Chief Legal Officer, Craig Salm, announced via a Twitter thread that they had filed a reply brief in their appeal against the US SEC. Salm stated that this is a significant milestone as Grayscale filed the Petition for Review in June, their Opening Brief in October, and the SEC’s Reply Brief in December. 

The recent brief is shorter than the previous one and “addresses counterpoints made by the SEC in their brief while also re-emphasizing key substantive arguments from” the Opening Brief.

Salm accused the SEC of treating spot bitcoin ETFs differently from bitcoin futures ETFs, despite both deriving their pricing from the same underlying spot bitcoin markets. 

Salm further stated that the “significant market test” used by the SEC to evaluate the proposal is deeply flawed, exceeds their statutory authority, and is arbitrary and unreasoned. 

Salm also stated that Grayscale believes:

Our proposal to convert GBTC to a spot bitcoin ETF satisfies the requirements of the Exchange Act because it is designed to prevent fraud and manipulation while protecting investors and the public interest.

He also announced that they would continue to keep their community apprised of developments in the litigation. The next milestone will be their final briefs, due February 2nd. He also noted that the timing for oral arguments is uncertain, but it may be as soon as Q2, the final decision in DC Cir. App. Court could come by Fall.

Salm Call Support For Grayscale Bitcoin Trust’s Case

Grayscale’s Chief Legal Officer Craig Salm, in a tweet on January 11th, called on the public to support their case. He emphasized that this case is of paramount importance for the 850k+ shareholders who hold GBTC, as the conversion is expected to close the current discount to NAV and unlock over $4 billion of value. 

Salm also stated that Grayscale has some of the best legal minds representing GBTC shareholders in the District of Columbia Circuit Court of Appeals, including Don Verrilli, a former Solicitor General under the Obama administration, and his team at MTO and Davis Polk. 

While expressing confidence that the Court will rule in their favor, Salm also acknowledged that they have committed to exploring alternative paths to returning capital to GBTC shareholders if their legal challenge is unsuccessful. 

These options could include a tender offer for a portion of GBTC shares, subject to relief and approvals from the SEC, as outlined by Sonnen shein. 

However, Salm emphasized that pursuing an alternative path would deviate from GBTC’s long-held ETF aspirations and would not be an ideal outcome. It would also effectively mean that regulators have shut the door on efficient access to Bitcoin through US-regulated investment vehicles.

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Grayscale Holds 3.28% Of The Bitcoin Market With $10.5B In BTC

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Today, Wu Blockchain revealed that Grayscale, a Leader in Digital Currency Investing, currently owns 632,000 Bitcoin (BTC) with a value of around $10.5 billion – accounting for 3.28% of the Bitcoin market’s worth. 

It is accompanied by an attractive premium rate of minus 45.17%. The company also has over 3 million ETH, with a total cost of $3.6 billion and taking up 2.54% of the Ethereum market’s overall worth.

Grayscale ETH’s premium rate is now minus 59.3%. With the current premium rate being negative 76.69%, the value of having more than 11.84 million Ethereum Classic is around $190 million, or about 8.50% of the currency’s market value.

Moreover, concerns among crypto investors have been raised by the status of the Grayscale Bitcoin Trust (GBTC), the biggest BTC trust in the world. 

However, there have been discussions about the fund’s future and whether it is facing problems due to the significant premium relative to its net asset value (NAV).

Grayscale Troubled Bitcoin Trust (GBTC)

The co-founder and CIO of Valkyrie Investments, Steven McClurg, recently announced the company’s intention to assume management of the Grayscale Bitcoin Trust.

The statement addressed the specific difficulties currently facing the GBTC and positioned the Valkyrie team as the most qualified to manage the fund.”

According to a report by Bloomberg on Monday, Nashville-based asset manager Valkyrie Investments announced the launch of the Valkyrie Opportunistic Fund to take advantage of the large discount on Grayscale Investments’ $10.5 billion GBTC product.

The Valkyrie fund intends to increase its ownership of GBTC to realize the total value of the underlying Bitcoin for its investors, which the company stated is a goal it will actively pursue on behalf of its investors.

Valkyrie Investments, Co-founder and CIO, Steven McClurg stated that:

We understand that Grayscale has played an important role in the development and growth of the bitcoin ecosystem with the launch of GBTC, and we respect the team and the work that they have done.

He added that a change is necessary due to recent events involving Grayscale and its related companies. Valkyrie believes it is the best company to manage GBTC and ensure that its investors are treated fairly.

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Here’s Why Grayscale is Being Sued For Allegedly Mismanaging Its GBTC

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Grayscale Investments is the target of a lawsuit brought by hedge fund Fir Tree. To look into “possible mismanagement and conflicts of interest” at its $10.7 billion Bitcoin fund, it is requesting information. The information sought might be used to compel the firm to alter how its flagship Bitcoin Trust—GBTC—is managed.

According to a recent Bloomberg report,

“Fir Tree, which manages $3 billion, wants to use the information to push Grayscale to erase the discount by lowering fees and resuming redemptions, said people familiar with the hedge fund’s plans. The trust has roughly 850,000 retail investors who have been “harmed by Grayscale’s shareholder-unfriendly actions,” the firm said in the complaint.”

Grayscale’s Redemption Bar “Self-Imposed”

Grayscale’s redemption bar, which dates to 2014, was allegedly “self-imposed,” according to Fir Tree. It further stated that the trust could permit investors to withdraw their money without obstruction under the law. However, the firm has stated in regulatory filings that it is unable to provide an “ongoing redemption program.”

The hedge fund further claimed that Grayscale resisted share redemption since doing so would reduce profits. The corporation allegedly sold “an incredible number” of additional shares between 2018 and 2021, according to the lawsuit. It imposed a 2% fee, higher than its rivals, on the market value of its Bitcoin holdings rather than the lower share market price. The firm received $615.4 million in fees last year, according to Fir Tree.

Grayscale’s attempts to turn the trust into an ETF must also be stopped, according to Fir Tree. The firm has often asserted that this is the only method company can legitimately redeem shares. According to a statement sent to Bloomberg by a Grayscale spokesperson through email,

“In 2013, we launched Grayscale Bitcoin Trust (GBTC) to provide investors with access to Bitcoin, and always with the intention of converting it to an ETF when permitted by US regulators. We remain 100% committed to converting GBTC to an ETF, as we strongly believe this is the best long-term product structure for GBTC and its shareholders.”

Since late February, GBTC shares have been trading at a discount. The discount gap was as wide as 43.04% at the time of publication.

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Source: Y Charts

Grayscale Refuses To Show On-Chain Proof Of Reserves, Citing Security Concerns

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Investors are understandably curious about their cryptocurrency investments. To answer these questions, Grayscale Investments LLC, a digital currency investment service provider, made an announcement on Twitter regarding the safety and security of its assets on November 18th.

Crypto Exchange FTX filed for bankruptcy last week after it lost the public’s confidence in its accounting of billions of dollars. In the wake of this disaster, Proof-of-Reserves, an approach where exchanges display their balance, has been brought up again to regain investors’ faith.

Nine other exchanges, including KuCoin, OKX, and Gate.io, made similar plans after Binance disclosed its intentions to share a proof-of-reserves. Others, like BitMEX, stated they will testify to the reserves directly, while some, like Gate.io, chose auditor-assisted proof-of-reserve validation.

However, Grayscale has cited “security concerns” as the reason for declining to offer on-chain proof of reserves or wallet addresses of its digital currency products.

The company said:

Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.

Grayscale Says It “Takes Transparency Seriously”

The company stated that it takes transparency seriously and has a long history of cooperating positively with authorities to increase complete and equitable risk disclosures for its digital asset offerings.

According to the statement:

The holdings of Grayscale’s digital asset products are safe and secure. Balances are reflected in historical public filings and have been evaluated by our third-party auditors.

In addition, each of the company’s digital asset products is established as a different legal entity from one another, “a statutory trust for single asset products and a limited liability company for diversified products.”

Moreover, the company highlighted that as a custodian for each product, Coinbase Custody holds all of the digital assets that underpin its digital asset offerings.

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Grayscale Refuses To Show On-Chain Proof Of Reserves, Citing Security Concerns 3

Grayscale’s digital asset offerings are governed by laws, rules, and legal agreements that forbid lending, borrowing, and other forms of encumbrance on the digital assets that underlie the products.

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Grayscale sues SEC; how the tables have turned

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Grayscale submitted documents to the Securities and Exchange Commission (SEC) in October of last year in order to turn its Bitcoin Trust into an ETF. Following several extensions, the regulatory agency on Wednesday issued a rejection decision. Likewise, Grayscale’s application did not address the regulator’s concerns regarding how it would guard against market manipulation and safeguard the interests of investors and the general public.

As a result, the SEC has not yet given the go-ahead for a spot Bitcoin ETF. However, it has already approved a few products based on futures. In November of last year, the crypto asset management firm wrote to the SEC with the same justification. They had argued that it was “arbitrary and capricious” for the SEC to approve futures products but not spot ones. Additionally, the firm underlined that the bias in question might constitute a breach of the Administrative Procedure Act.

Donald B. Verrilli, Jr., senior legal strategist at the firm, reiterated the same by saying,

“As Grayscale and the team at Davis Polk & Wardwell have outlined, the SEC is failing to apply consistent treatment to similar investment vehicles and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934.”

Recall that Grayscale strengthened its legal staff by hiring Donald Verrilli, a top attorney from the Obama administration, at the beginning of June. The company was already considering the risk that the decision might not be in its favour at the time. Notably, Verrilli served as US solicitor general under the Obama administration from 2011 to 2016. He had acted as the government’s attorney in numerous Supreme Court matters.

Grayscale treads on legal waters

Grayscale made the decision to quickly traverse legal waters when the rejection order was issued. The CEO of Grayscale, Michael Sonnenshein, announced on Twitter that a lawsuit had been filed to contest the SEC’s judgement.

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In his final statement, Sonnenshein said that Grayscale will keep using its “full resources” to fight for its shareholders’ rights and the “equitable regulatory treatment” of Bitcoin investment vehicles.

Inverse Bitcoin ETF beneficial for crypto: Grayscale CEO

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Grayscale CEO Michael Sonnenshein recently asserted on Twitter that the introduction of the first short Bitcoin exchange-traded fund (ETF) in the United States could be encouraging for the cryptocurrency sector.

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He thinks that the U.S. Securities and Exchange Commission’s approval of new BTC-related goods shows that the powerful regulator is gradually growing more at ease with the biggest cryptocurrency.

According to U.Today, on Tuesday, trading on the New York Stock Exchange (NYSE) began for the ProShares Short Bitcoin Strategy (BITI), which provides exposure to the inverse performance of the biggest cryptocurrency.

The SEC’s approval of ProShares’ Bitcoin futures ETF in October was seen as a turning point for the cryptocurrency market and rekindled the second stage of the 2021 bull run.

But the authority has so far turned down every application to allow a spot-based Bitcoin ETF. Currently, Grayscale is putting up a valiant campaign to persuade the SEC to turn its flagship trust into an exchange-traded fund. Sonnenshein has nevertheless emphasized that he is not identifying the recent correction’s bottom.

BTC’s price dropped to $17,500 on Saturday, but it was able to launch a small comeback after that. The top cryptocurrency experienced a rise on Tuesday, reaching a high of $21,708.

Bitcoin to Test $17,000 Again?

Former NYSE Group President Tom Farley recently claimed that the price of Bitcoin may end up retesting the $17,000 level during an appearance on CNBC.

Yet he considers the current price decline to be a “very wonderful” purchasing opportunity, suggesting that the cryptocurrency has at least temporarily struck a bottom. Farley is of the opinion that the market has already capitulated.

After a protracted run of losses, the largest cryptocurrency in the world was able to retake the $21,000 mark earlier today, marking a tiny success for bulls.

Arthur Hayes, the former CEO of BitMEX, forewarned on Monday that there would be additional forced selling as a result of market uncertainty. In the past, Paul Krugman, a Nobel Prize-winning economist, warned that the tiny comeback would just be a dead-cat bounce.

Chris Burniske, a cryptocurrency analyst, recently tweeted that he would not be surprised if BTC fell under the $10,000 mark. There is more possibility for a downturn because miners have not yet given in. Burniske also thinks that the unfavorable macro environment will make it difficult for Bitcoin to recover.

Grayscale Investments Unveiled Europe’s First ETF

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The world’s largest digital asset manager Grayscale Investments’ plan of expanding its footprint in the European market got a new lease of life as it announced its first European ETF called Grayscale Future of Finance UCITS ETF [ticker: GFOF].

The newly launched ETF is slated to be listed on the London Stock Exchange [LSE}, Borsa Italiana, and Deutsche Börse Xetra will also be “passported for sale” across Europe.

For those unfamiliar, Passporting allows a firm registered in the European Economic Area [EEA] to set shop in any other EEA state without further authorization.

Coming back to the press release, the investment vehicle is designed to offer investors exposure to firms across domains like finance, technology, and digital assets – as well as firms shaping the digital economy, all through the familiar ETF wrapper.

In February 2022, Grayscale listed an ETF in the United States that tracks the investment performance of the Bloomberg Grayscale Future of Finance Index.

Speaking on the historic launch, Grayscale Investments CEO Michael Sonnenshein stated,

We announced our first ETF earlier this year in partnership with Bloomberg as part of the expansion of our business. With growing global demand from both institutional and individual investors for Grayscale products, we’re thrilled to be expanding our offering in Europe through the UCITS wrapper.

“This product draws upon our historical strengths while furthering our evolution as an asset manager that helps investors build portfolios that can stand the test of time. GFOF UCITS ETF is the natural next step in our global strategic journey,” he added.

The investment firm’s plan to enter Europe’s crypto market was the result of a number of meetings held with local partners, Sonnenshein said.

Grayscale’s Tussle With SEC

The European crypto fund market has become more competitive in recent months, with the arrival of several rival exchange-traded products [ETP] being listed in Switzerland, Germany, and elsewhere by firms such as 21Shares.

As of March, 73 crypto ETPs had been granted approval in Europe, with a total of $7 billion in assets.

Apart from making a mark in this market, Grayscale is also seeking to convert its bitcoin trust into an ETF in the U.S. but has been frustrated by the Securities and Exchange Commission [SEC].

The U.S. markets regulator has so far green signaled 4 BTC future ETFs but none that invest in the crypto directly.

Grayscale doubles down on its efforts for a Spot Bitcoin ETF

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Asset management firm Grayscale has renewed efforts to gain permission from the US securities watchdog in converting the world’s largest crypto investment vehicle into an exchange-traded fund.

As per a letter sent to the regulator, the asset manager is bolstering its application with the Securities and Exchange Commission to convert its $40 billion Bitcoin Trust into a spot Bitcoin ETF.

The latest move from Grayscale comes as the SEC is contemplating whether to give the green signal for US exchange-traded funds to hold bitcoin, rather than derivatives linked to the cryptocurrency, for the first time.

The investment firm is currently awaiting to hear back from the SEC in early July on a decision that would change its Bitcoin Trust into an ETF. If they are rejected, Grayscale Investments CEO Michael Sonnenshein has hinted that it is willing to flip the script and take SEC to court.

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While there is no doubt that Grayscale’s CEO has been one of the vocal SEC critics, he is not alone. In an interview, this month, Bitwise Asset Management’s Matt Hougan took note of the fallacy and said,

“The SEC is objecting on the grounds of manipulation concerns, but its specific request was to demonstrate that regulated CME markets are of significant size. Bitcoin is now an institutional market. It’s a market with institutional service providers, institutional investors, and a large and robust regulated futures market.”

Grayscale’s gambit is monumental for the crypto industry

Several other crypto firms have already been reprimanded in their attempts to open similar funds and Grayscale’s gambit represents one of the crypto industry’s last hopes of launching such a product in the near future.

But that has hardly acted as a deterrence. As ETF Trends CEO Tom Lydon pointed out that a growing number of financial advisors are interested in investing in a bitcoin ETF.

A 2022 Bitwise/ETF Trends Survey revealed that 82% of advisors prefer a spot bitcoin ETF over a futures-based alternative. The demand has also increased for bitcoin products that investors can purchase on traditional brokerage platforms, Lydon said.

Right now, there are not many choices, so it’s not going backward, he added. Crypto experts are still hopeful a spot bitcoin ETF could make its entry as early as this year.