Bitcoin ETFs Face a Critical Deadline. What It Means for the Token.

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Crypto investors will soon get the latest smoke signal from the Securities and Exchange Commission on whether a spot Bitcoin exchange-traded fund could soon come to market. The decision could have big ramifications for the token.

The SEC faces a midnight Friday deadline to challenge its loss in court to Grayscale Investments, which has sought for years to convert the
Grayscale Bitcoin Trust
(ticker: GBTC) into an ETF.

The trust right now has about $16.6 billion under management but trades like a closed-end fund with a price that can deviate significantly from the value of its underlying assets. As of Wednesday’s close, GBTC’s price, at $20.07, was about 16.5% below the price of the Bitcoin it holds.

Scores of hedge funds and other investors have bet the discount will close, potentially netting them billions of dollars, if the trust is allowed to convert into an ETF and to follow the usual share redemption and creation process that keeps prices aligned.

The decision could also have ramifications for Bitcoin itself. Fidelity,
(IVZ), and other firms have applied to launch Bitcoin ETFs of their own. If the SEC lets those funds come to market, some analysts have predicted that billions of dollars could flow into the token as investment advisors and other institutions gain a way to buy it in a product they’re familiar with.

It’s unclear whether the SEC, which has consistently denied those applications, is about to capitulate now. In a hearing last month, SEC Chair Gary Gensler said the agency was “still considering” the appellate court decision.

The agency didn’t respond to a request for comment on Thursday.

In the decision, which came in August, a panel of judges in the U.S. Court of Appeals for the D.C. Circuit ruled that the SEC acted arbitrarily and capriciously when it rejected Grayscale’s bid to convert GBTC into an ETF. The SEC had said Bitcoin-trading platforms had insufficient surveillance for fraud and manipulation, but Grayscale argued there was no reason to draw a distinction between spot Bitcoin ETFs and exchange-traded products based on Bitcoin futures, which the SEC has already approved.

The ruling kicked off a 45-day period during which the SEC could choose to ask for an “en banc” hearing in front of all of the appellate court’s judges. That deadline expires at midnight on Friday. In theory, the agency could later ask for an appeal at the Supreme Court even if it declines to file for an en banc hearing.

The court’s decision, if put into effect, would vacate the SEC’s rejection, sending the application back to the agency.

The agency could still reject Grayscale’s bid on grounds that weren’t raised in court. It’s unclear how quickly the agency would have to make that decision, and Grayscale’s attorneys in a letter last month argued that the deadline to make such a determination has long since expired. To convert the fund, Grayscale would also need to file and get approvals for other aspects of the application.

A Grayscale spokeswoman in a comment to Barron’s said that the firm is operationally ready to convert GBTC into an ETF as soon as it gets approval to do so.

Given the SEC’s vehement opposition to ETFs in the past, it wouldn’t be surprising if the agency finds a way to put off the products again, but this is a saga that finally seems to be nearing a conclusion.

Write to Joe Light at [email protected]

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