We recently announced that Grayscale Senior Legal Strategist, former U.S. Solicitor General, and partner at Munger, Tolles & Olson, Donald B. Verrilli, Jr., filed a Petition for Review with the United States Court of Appeals for the D.C. Circuit on behalf of Grayscale — the first step in our litigation process to contest the Securities and Exchange Commission’s (SEC) decision on our proposal to convert Grayscale Bitcoin Trust (GBTC) to a spot Bitcoin ETF*.
We sat down with Craig Salm, Grayscale’s Chief Legal Officer, to discuss the lawsuit and address some common questions we hear from investors.
Craig, thanks for taking the time to talk about the Petition for Review and the recently announced lawsuit against the SEC. Could you first give us an overview of the history of our application process to convert GBTC to a spot Bitcoin ETF?
In October 2021, we filed a Form 19b-4 with the SEC to convert our flagship product, Grayscale® Bitcoin Trust (OTCQX: GBTC), to a spot Bitcoin ETF. The filing of our application started a standard 240-day open review period.
Throughout this time, we developed and deployed a nationwide, multi-channel campaign to elevate the voices of investors. We engaged with policymakers, regulators, trade associations, academics, and the general public to explain the details of the filing process, as well as the importance of leveling the playing field with a spot Bitcoin ETF. Our CEO Michael Sonnenshein summarized that campaign in-depth here.
We were encouraged by the outpouring of support we saw from across all fifty states, with more than 11,500 comment letters submitted in favor of GBTC’s conversion.
Ultimately, on June 29 2022, we found out that the SEC denied our application to convert GBTC to an ETF. That same day, our legal counsel filed a Petition for Review with the Court of Appeals for the D.C. Circuit, initiating a lawsuit to contest the SEC’s decision. You can read the press release about that announcement here.
So, the first step is the Petition for Review. Can you explain what that is and why it’s significant?
The Petition for Review asks the court to review the SEC’s decision to deny our application to convert GBTC to a spot Bitcoin ETF, and is the first step in initiating a lawsuit. You can see a PDF version of our Petition for Review here. This document, as well as others related to the lawsuit, will be publicly viewable on a site called Electronic Court Filings (ECF) – a system where all federal lawsuits are filed.
One procedural nuance is that our application to convert GBTC to an ETF was denied by the SEC’s full Commission, consisting of both the Chair and its Commissioners. As a result, we were able to immediately pursue litigation with the courts. You can see how each voted here.
What happens after the Petition for Review is filed?
There are a few stages involved in the litigation process, including briefings, the selection of judges, oral arguments, and the final decision.
In the coming weeks and months, Grayscale and our legal counsel will engage with the court to set up briefing schedules. We will file written briefs that lay out the substance of our arguments, and reinforce why we think the court should overturn the SEC’s decision. The SEC will also have an opportunity to provide counterarguments, and then Grayscale is afforded one final opportunity to counter the SEC’s responses.
Importantly, this is also when third parties with a strong interest in the matter can send in amicus curiae (which is latin for “friend of the court”), or briefs arguing why they think the court should or should not rule in our favor.
2. Selection of Judges
In parallel to the briefing process, three judges will be selected from the pool of D.C. Circuit judges. This is not the kind of court where a panel of jurors determine the outcome. Instead, these three judges will hear our case, and eventually make a determination.
3. Oral Arguments
Our lawyers, including Donald B. Verrilli, Jr., will come before the panel of judges to share Grayscale’s arguments, and answer any of the judges’ questions. The SEC’s lawyers will have that same opportunity. These oral arguments will take place at the D.C. Circuit Court of Appeals. The oral arguments are recorded and shared with the general public afterwards.
4. Final Decision
The panel of judges will vote, and make a final decision about who wins the case.
Why does this go directly to the D.C. Court of Appeals, and not the D.C. District Court?
The federal court system has three levels:
- District courts, also known as the trial courts;
- Appellate courts, which are the first level of appeal; and
- The Supreme Court of the United States, which is the final level of appeal in the federal judicial system.
However, because Grayscale is suing a federal agency – the SEC – we bypass the district court level, and our case moves immediately to the appellate court level. This is important because it shortens the timeframe to get a final decision.
Does this lawsuit jeopardize Grayscale’s productive working relationship with the SEC moving forward?
This was certainly not a decision we made lightly, but litigation by market participants against their regulators is not an uncommon occurrence. When private businesses disagree with government actions, they can appeal to the court system to make thoughtful and reasoned determinations. It’s a reflection of how strong our democratic process is.
We have nothing but respect for the individuals at the SEC who have spent years working through difficult issues presented by the novelty of digital assets, and that certainly includes spot Bitcoin ETFs. That said, when a market participant like Grayscale disagrees with how the SEC is interpreting regulations that would permit GBTC to convert to a spot Bitcoin ETF, we can either appeal to Congress to change the law (which includes a whole host of uncertainties), appeal to the courts, or do nothing.
What’s the basis for Grayscale’s argument?
We’ve previously described the substance of our arguments in A New Argument for a Bitcoin ETF and Another New Argument for a Bitcoin ETF. To summarize, the SEC’s denial draws a distinction between Bitcoin futures ETFs and spot Bitcoin ETFs because it believes the exchange where Bitcoin futures trade – Chicago Mercantile Exchange (CME) – has regulation and surveillance sufficient to account for concerns such as fraud and manipulation. However, we believe these are distinctions without a difference in the context of Bitcoin ETF approvals because Bitcoin futures and spot Bitcoin derive their pricing from the same underlying spot Bitcoin markets. As a result, we believe that approval of Bitcoin futures ETFs, but not Bitcoin spot ETFs, is “arbitrary and capricious” and “unfair discrimination,” in violation of the Administrative Procedure Act (APA) and Securities Exchange Act of 1934 (“Exchange Act” or “‘34 Act”).
The APA is the regulation that governs how regulators govern and requires, in part, that the SEC treat like situations alike, absent reasonable justification for disparate treatment. In the context of Bitcoin ETFs, that means treating both futures and spot-based ETFs alike. The Exchange Act, or ‘34 Act, is what governs the ability of Bitcoin ETFs to be listed on national securities exchanges like NYSE Arca. Given that both types of ETFs are priced based on the same underlying Bitcoin market, we believe the Appellate Court will understand and appreciate these straightforward arguments.
In the unfortunate event that the Appellate Court is not convinced by Grayscale’s arguments and we lose the lawsuit, what happens next?
If Grayscale loses at the Appellate level, there are two options: we can seek an “en banc” hearing, or appeal to the U.S. Supreme Court.
In an en banc hearing, instead of the three randomly selected judges making a decision about our case, the entire group of judges in the D.C. Circuit will weigh-in to make a final decision. It’s worth noting, though, that an en banc hearing is rare, and usually only occurs if there’s a split decision and not strong justification for the decision (i.e., one judge votes differently from the other two).
If either Grayscale or the SEC lose, either party could appeal the decision to the Supreme Court. If the Supreme Court decided to take the case on, we would proceed with a similar litigation process as in the appellate level: petition for review, briefings, oral arguments, and final decision.
One of the most common questions we’ve received is: What’s the timeline here? How long do you anticipate this process will take?
Grayscale’s timeline is shortened because we bypass one level of the court system and go directly to the D.C. Circuit Court of Appeals due to the fact that the petition concerns a federal agency. We’ve already started the litigation process by filing the Petition for Review within an hour of receiving the SEC’s decision.
We can’t be certain about timing, but based on how long federal litigation tends to take – including briefings, oral arguments, and a final court decision – it can typically take anywhere from twelve months to two years, but could be shorter or longer. However long it takes, we believe the strength of our arguments should result in a final decision in our favor at the D.C. Circuit Court of Appeals.
*We use the generic term “ETF” to refer to exchange-traded investment vehicles, including those that are required to register under the Investment Company Act of 1940, as amended (the “‘40 Act”), as well as other exchange-traded products which are not subject to the registration requirements of the ‘40 Act.