Author: Jaleel, Kaori, Joyce, Luccy, BlockBeats

Editor: Jaleel, BlockBeats

Recently, some narratives in the cryptocurrency industry have gradually weakened, and Bitcoin has fallen below $26,000 multiple times, causing its market value to drop below $500 billion and hitting its lowest point since June 20, erasing about half of the gains since BlackRock applied for a Bitcoin ETF on June 15.

However, tonight, Grayscale won the lawsuit and overturned the SEC's decision to block the Grayscale ETF. The overall market rose by 6.48% in the short term, with Bitcoin breaking through $28,000 and Ethereum breaking through $1,700 in the short term. Ethereum network gas fees also briefly exceeded 100 gwei. At the same time, STX rose more than 18% in the short term, CYBER rose 22.81%, and Coinbase's stock price rose 14.10% during the day, the largest single-day increase since July 13. Many short positions were exposed, with over $80 million liquidated in the past hour across the entire network.

According to court documents, a Washington appeals panel consisting of three judges overturned the decision by the US Securities and Exchange Commission (SEC) to block the Grayscale ETF. The court stated that "rejecting Grayscale's proposal was arbitrary and capricious because the SEC failed to explain its differing treatment of similar products."

Gray scale represents "this ruling is a milestone for American investors and the Bitcoin ecosystem." The reason why it is a milestone is that if a Bitcoin spot ETF is launched, the cryptocurrency will usher in a historic moment. At that time, GBTC is expected to be successfully converted into an ETF, and its negative premium will no longer exist.

Over the past three years, SEC has rejected Grayscale for various reasons.

As one of the traditional financial institutions that entered the cryptocurrency market early on, Grayscale has planned to apply for the conversion of its BTC Trust to an exchange-traded fund (ETF) since October 2020. The asset growth of Grayscale's Bitcoin Trust (GBTC) managed by Grayscale has outperformed most registered ETFs in the United States.

During these three years, the SEC has refused for various reasons. On November 12, 2021, the SEC rejected the application on the grounds that it did not meet the requirements of the 1934 Securities Exchange Act. On June 30, 2022, the SEC again rejected Grayscale's application to convert its GBTC to a Bitcoin spot ETF. The SEC stated that the application failed to address concerns about preventing fraud and manipulation and other concerns of the US Securities and Exchange Commission.

At this time, Grayscale decided to officially file a lawsuit against the SEC. In contrast to the current troubles the SEC is causing in the cryptocurrency industry, Grayscale took a strong stance and chose to sue the SEC. On that day, Grayscale's CEO Michael Sonnenshein announced on social media, "We have filed a lawsuit against the U.S. Securities and Exchange Commission."

This year, Michael Sonnenshein once again expressed his determination and toughness to fight against the SEC. He expects a ruling on the SEC's refusal to approve a Bitcoin spot ETF lawsuit to be made in the third quarter of this year and is using all resources to legally fight against the US SEC. If US regulators still refuse to recognize the legal securities status of Bitcoin ETF, Grayscale will not hesitate to take the lawsuit to the Supreme Court if necessary.

In order to achieve a Bitcoin spot ETF, Grayscale took a clever step and began preparing for the issuance of an ETH futures ETF. After receiving a regulatory warning from the SEC, Grayscale wrote to the Federal Appeals Court to protest the SEC's differential treatment of Bitcoin ETF products. On July 12th, according to an official announcement, Grayscale's lawyers submitted a letter to the US District of Columbia Circuit Appeals Court, protesting the SEC's approval of leveraged Bitcoin futures ETFs while continuing to refuse to approve spot Bitcoin ETFs such as GBTC. Grayscale's well-founded argument is that the SEC's approval of leveraged Bitcoin futures ETFs provides more support for its legal argument that the SEC is acting arbitrarily. Grayscale points out that there is no sufficient reason to continue to refuse to approve spot products while allowing leveraged futures products to trade.

Grayscale has submitted a statement to the SEC, stating that the SEC should approve all Bitcoin spot ETF applications to provide equal treatment to all applicants. Only approving proposals that are listed, including Ark 21 Shares, Invesco Galaxy, iShares (BlackRock), Valkyrie, VanEck, WisdomTree, and Wise Origin (Fidelity), will reflect a positive "sudden and significant change" that involves the committee's application of relevant statutory standards, which will give these proposals an unfair discriminatory and prejudicial first-mover advantage.

SEC has expressed concerns about the lack of liquidity or trading volume in the spot market for cryptocurrency in its past rejections of cryptocurrency spot ETFs. These cryptocurrencies are traded on unregulated trading platforms, making them difficult to monitor, and market manipulation has been a long-standing issue in the spot market. Although SEC has approved cryptocurrency futures ETFs, these ETFs are all on platforms regulated by US financial regulators.

Returning to the lawsuit that was won, on October 12th of last year, Grayscale submitted an opening brief regarding the SEC's rejection of its application for a Bitcoin exchange-traded fund. Grayscale's Chief Legal Officer, Craig Salm, stated that there is no difference between a spot ETF and a futures ETF "in the context of Bitcoin" because "the pricing of Bitcoin futures on the CME is inherently lower than the spot Bitcoin market." The brief stated that the U.S. Securities and Exchange Commission failed to demonstrate why it would treat Bitcoin futures ETPs and spot Bitcoin ETPs differently, thus violating the most basic requirements of the U.S. Administrative Procedure Act.

Previously, Nathan Geraci, the President of consulting firm The ETF Store, stated that once the court's verdict is favorable to Grayscale, the key to approving a spot Bitcoin ETF will be how the SEC views the Coinbase monitoring sharing agreement proposed by the ETF listing trading platform. If both are without issue, it will undoubtedly have a promoting effect on the approval of a spot Bitcoin ETF.

Why is this a huge victory?

Grayscale has remained optimistic throughout this lawsuit and recently stated that they are recruiting senior advisors for their ETF team to assist with various stages of the product lifecycle, including product strategy, conceptualization, listing, and post-listing support.

Matthew Sigel, Director of Digital Asset Research at VanEck Fund Group, expressed his opinion on the matter: "The SEC's policy on cryptocurrency ETFs has always been arbitrary. Now it's completely inconsistent."

And the outcome of this lawsuit also demonstrates the court's attitude towards the SEC. According to court documents, a three-judge panel in Washington overturned the decision by the US Securities and Exchange Commission (SEC) to block the Grayscale ETF. The court stated that "rejecting Grayscale's proposal was arbitrary and capricious because the SEC failed to explain its differing treatment of similar products."

Not only the court, but also the attitude of Congress towards SEC seems unfriendly. On June 12th, US Congressman Warren Davidson proposed the "SEC Stability Act" to the House of Representatives. One of the main provisions of the bill is to restructure the US SEC and dismiss SEC Chairman Gary Gensler.

Related reading: "US lawmakers propose restructuring SEC, Gary Gensler may step down?"

The proposal has received support from another congressman, Tom Emmer. "American investors and the industry should be subject to clear and consistent supervision, not political games. The 'US SEC Stability Act' will bring sensible reforms to ensure that the primary mission of the US SEC is to protect the investors they are responsible for, rather than catering to the whims of their reckless chairman," said Tom Emmer in a press release.

SEC's inconsistency has become a consensus among the US legislative and judicial branches. As for the outcome of the lawsuit, although Grayscale won the lawsuit, it does not mean that GBTC can be freely converted into an ETF, "but this has taken the conversion one step forward."

Cinneamhain Ventures partner Adam Cochran (@adamscochran) believes that "the complete decision is a slaughter of the SEC's argument and requires a comprehensive review of Grayscale's application. From now on, the SEC's options are: delay the decision, come up with new false reasons; concede and approve; or request an appeal of the case."

"But given the reasons for the court's ruling and the fact that they repeatedly pointed out the SEC's failure to support any of its arguments, a comprehensive appeal would be a terrible decision that could only anger the court. So this is a huge victory." wrote Adam Cochran on social media.

Since the beginning of this year, including BlackRock, a total of 8 large financial institutions have submitted Bitcoin ETF applications to the US SEC. Data shows that as of August 20th, there are at least 16 ETF applications related to Ethereum waiting for regulatory approval, and these companies have not withdrawn their applications. This series of applications highlights a moment of change in financial history, marking the intersection of traditional investment tools and digital assets.

Bitwise's application for a Bitcoin ETF is only one day apart from BlackRock's application, and despite being rejected by the SEC earlier due to fraud and manipulation issues, Bitwise remains steadfast.

WisdomTree is not willing to give up and has resubmitted its application for the WisdomTree BTC Trust. Despite two unsuccessful attempts, they still hope to let investors understand the price trend of BTC. Finally, Fidelity Investments has also joined the ranks of BTC ETF.

After starting the review, SEC has a total of 240 days to make a decision on the application, and the first deadline for the next batch of ETF applications is September 2. Bitcoin ETFs will face intensive approval. It is expected that SEC will respond to the Bitcoin ETF application files submitted by Bitwise, BlackRock, VanEck, WisdomTree, and Invesco on September 2.

Bitwise's application will be reviewed before Friday, and other applications will be reviewed the following day, so the SEC may weigh in before the weekend. Additionally, responses to applications from Valkyrie and Globle X were made on September 4th and October 10th, respectively.

Ark Investment Management and 21Shares have been seeking approval for the ARK 21Shares BTC ETF since 2021.

The process of approving a Bitcoin ETF has not been without obstacles. Market manipulation, liquidity, and the inherent volatility of assets in the crypto industry are some of the reasons why regulatory agencies such as the SEC have been cautious. For this reason, the SEC rejected applications from Ark Investment Management and 21Shares. However, Cathie Wood, CEO of Ark, speculates that the SEC will approve multiple ETFs at the same time, and success will depend mainly on marketing and effective communication.

Once the Bitcoin spot ETF is officially listed in the United States, it will become a milestone event in the global blockchain industry. The US regulatory authorities have legally recognized the status of Bitcoin as a financial product, and the influence of the US on the price of Bitcoin will be even greater.

集中利好，最大的受益方或是 GBTC 背后的 DCG 帝国

Concentrated benefits, the biggest beneficiary may be the DCG empire behind GBTC

Barry Silbert founded DCG in 2015 and subsequently created the "DCG Empire" by investing in hundreds of projects and companies. The most important company in DCG's investment portfolio is Grayscale Investments, which currently holds approximately 623,000 bitcoins through GBTC.

Due to the complexity of compliance and trading, institutional investors find it difficult to directly hold BTC, while for individual investors, there is a certain learning curve for trading and storing cryptocurrencies. The Bitcoin Trust Fund GBTC managed by Grayscale Investment Management largely helps to solve this problem. Therefore, many institutions participate in the premium arbitrage movement by leveraging the product structure of GBTC.

BlockBeats Note: When the stock of the grayscale Bitcoin trust fund changes hands at a price higher than the underlying Bitcoin price, GBTC trades at a premium. Conversely, if the trading price of GBTC stock is lower than the net asset value, it is considered a discount (negative premium) trade.

GBTC tracks the price of Bitcoin but is not completely consistent with it, and its premium rate has always been an important indicator in the cryptocurrency market. Before the cryptocurrency market turned bearish, the negative premium trend of GBTC seemed to be irreversible. In order to convert the trust into a spot Bitcoin ETF and correct the "discount" of GBTC, Grayscale has been pushing for the conversion of GBTC into a spot ETF, but all three applications have been mercilessly rejected by the SEC.

During the peak of the bull market in 2020-2021, the value of GBTC shares exceeded that of underlying Bitcoin. Many people believe that it was precisely because of Grayscale's GBTC that the previous bull market cycle occurred.

However, since the end of February 2021, GBTC has been in a negative premium state. With the collapse of CeFi institutions such as Celsius, Three Arrows, and FTX, the arbitrage opportunities between GBTC and other platforms gradually disappeared. GBTC also experienced an unprecedented "big discount", which continued to expand during the bear market in 2022. The sustained negative premium of GBTC was also once believed to have dragged down the development of the DGC empire.

Related reading: "GBTC continues to trade at a discount, will it drag down DCG?"

But as the grayscale and SEC litigation processes gradually become clear, in March of this year, Eric Balchunas, a senior ETF analyst at Bloomberg, and Elliott Z Stein, a senior legal analyst, wrote that Grayscale's chances of winning had increased to 70%. Many well-known investors are optimistic about the future development of GBTC, and Cathie Wood has repeatedly praised the future rise of GBTC and expects it to return to a positive premium. Her Ark Investment is also the largest holder of GBTC. More and more investment institutions in the market are also optimistic about Grayscale's chances of winning, and the negative premium of GBTC is gradually stabilizing.

Since mid-June, BlackRock, one of the world's largest asset management groups, has submitted a filing for a bitcoin ETF with the US SEC through its subsidiary iShares, which has attracted great attention from the market. Many traditional financial giants have also followed BlackRock's lead in applying for ETFs. The daily trading volume of GBTC has continued to rise and soared to a new high of $183 million on July 13th, the highest level this year.

Related reading: "Why is the crypto community generally pessimistic about applying for a Bitcoin ETF under the high regulatory pressure of BlackRock?"

GrayScale CEO Michael Sonnenshein previously stated at the CoinDesk 2023 Consensus Conference in April that the company may know by the end of Q3 this year whether it can convert its $17.5 billion GBTC into a physically-backed Bitcoin ETF. As we approach the last week of summer, the day of revealing "that result" is getting closer.

As the final judgment draws near, the rising sentiment of GBTC has long been there. Now that Grayscale has won the lawsuit against SEC, it's like adding fuel to the fire. After winning the lawsuit, GBTC's negative premium rate has responded positively and rapidly.

According to the latest data from Coinglass, the total position of the grayscale fund is about 16.3 billion US dollars, and the GBTC discount has narrowed from 25% yesterday to 17%. The discount is still narrowing, and it has recovered about 31.62% from the highest discount rate in December 2022 (when the discount reached 48.62%).

Interestingly, just this morning when the verdict was announced, DCG reached a preliminary agreement with Genesis' creditors, allowing unsecured creditors to receive recoveries equivalent to 70% to 90% of the US dollar value, and depending on the nominal value of digital assets, physical recoveries ranging from 65% to 90%. Prior to court approval, DCG is expected to inject over $1 billion in new debt financing into Genesis.

Last year, after the closure of cryptocurrency hedge funds Three Arrows Capital and FTX, Genesis, a subsidiary of DCG, suffered a severe financial blow. In January of this year, Genesis filed for Chapter 11 bankruptcy protection under US bankruptcy law with the New York Federal Bankruptcy Court.

DCG's current goal is to clear existing debts, including approximately $630 million in unsecured loans due in May 2023 and $1.1 billion in notes due in 2032. According to documents, its repayment plan is divided into two parts: one involving $328 million due within two years and the other involving $830 million due within seven years. In addition, DCG has committed to making four installment payments totaling $275 million to pay off the loan due in May 2023.

Considering the lawsuit won by Grayscale on the same day against SEC, DCG's move can be seen as quite meaningful.

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