In October 2021, we announced that NYSE Arca filed Form 19b-4 with the Securities and Exchange Commission (SEC) to uplist our flagship product, Grayscale® Bitcoin Trust (symbol: GBTC), into a spot-based Bitcoin ETF. If the SEC approves the filing, it would be a big step, not only for Grayscale, but for our investors, our industry partners, and everyone who believes that digital currencies will transform our future. It’s significant enough that the SEC has solicited public comments on the decision.
We sat down with Craig Salm, Grayscale’s Chief Legal Officer, to discuss the uplisting to an ETF, and address some common questions we hear from investors and on social media.
Craig, thanks for taking the time to talk about the 19b-4 comment period, and what GBTC’s conversion to an ETF could mean for our investors. Could you first give us an overview of how ETFs work generally?
Absolutely. Let’s start with the primary features of an ETF. An ETF is an investment product with the following qualities:
- Its shares trade like a stock on a national securities exchange, such as NYSE Arca or Nasdaq
- It includes a simultaneous share creation/redemption mechanism that…
- …allows the shares to trade at the Net Asset Value (NAV) of its holdings via arbitrage.
Market participants called authorized participants (APs) – essentially broker dealers like banks and trading firms – can create shares of the ETF when shares trade at a premium, or redeem shares from the ETF when shares trade at a discount, earning a profit.
So, what is GBTC now, and how does it differ from an ETF?
GBTC is an investment trust that owns over 3.4% of all Bitcoin currently in circulation. As of February 2022, each share of GBTC was backed by 0.00092896 actual Bitcoin. GBTC shares do not own anything other than Bitcoin, nor do the shares employ leverage or the use of derivatives such as Bitcoin Futures contracts. The underlying Bitcoin tokens are held in secure offline storage. In addition to managing the custody relationship, Grayscale oversees day-to-day administration, communications with regulators, reporting, financial statements and other features of familiar publicly traded investment vehicles.
An ETF’s shares would be registered with the SEC under the Securities Act of 1933, which contrasts with how GBTC shares have historically been offered: through a private placement process that is exempt from registration under the ‘33 Act pursuant to Rule 506(c) of Regulation D, and therefore makes them initially only available to accredited investors and subject to a six month holding period. GBTC shares today are also not redeemable.
What this means is that if GBTC is trading at a premium, you can’t immediately create more shares to supply to the market to realign the price with the Net Asset Value (NAV). Conversely, because GBTC also does not offer a redemption program, shares can’t be redeemed when there is a discount. GBTC shares can, and have, traded at both premiums and discounts to NAV. For example, GBTC is currently trading at a discount to NAV, and has historically traded at an average premium of approximately 37 percent.
Why doesn’t GBTC currently have redemptions?
Since its inception, GBTC was intentionally structured to eventually convert into an ETF pending the approval of U.S. regulators. As part of the approval process, the SEC would grant GBTC something called Regulation M (Reg M) relief, which allows for a fund to simultaneously create and redeem shares, thus enabling APs to engage in that properly functioning arbitrage mechanism I described.
GBTC in its current state, however, offers liquidity through the OTCQX market, where any type of investor — retail or institutional — can buy and sell freely tradable shares. OTCQX is not a national securities exchange, like NYSE Arca. However due to GBTC’s registration under the Securities Exchange Act of 1934, it does currently provide periodic and current SEC reports like 10-Ks and 10-Qs and audited financial statements just like any other stock that trades on a national securities exchange.
So, what would happen if GBTC’s conversion to an ETF is made effective?
We can reasonably expect the following:
First, because the arbitrage mechanism would be activated through the availability of simultaneous creations and redemptions, GBTC share prices will likely move to trade in line with NAV.
Then, the shares would be uplisted from OTCQX to NYSE Arca. Grayscale and our partners would handle this behind the scenes.
Importantly, if you are an investor that’s already holding shares of GBTC you wouldn’t have to do anything. None of this should inherently represent a taxable event for shareholders either.
Will GBTC’s fee structure change?
Yes, Grayscale has publicly committed to lowering fees if GBTC is converted to an ETF. While we aren’t yet publicly sharing a specific fee level, we are committed to creating a competitive spot-based Bitcoin ETF product.
What about other Grayscale funds?
All of our crypto investment products are designed to follow the same product roadmap, beginning with private placements and ending with conversion into an ETF, pending regulatory approval. GBTC is merely the first to advance to this stage. Some of the factors informing this decision are that GBTC is our oldest and largest investment product, and that Bitcoin is the world’s first and most widely traded cryptocurrency.
Is there anything investors need to do to prepare?
Current holders of publicly traded shares of GBTC don’t need to do anything to prepare; investors would see their shares of GBTC automatically become shares of the ETF upon conversion.
Is there anything investors can do to support the process?
As things stand today, we are still waiting for U.S. regulators to approve a physically-backed or “spot” version of a Bitcoin ETF. As mentioned, in October 2021 Grayscale and NYSE Arca submitted a filing to the SEC to convert GBTC into a spot-based Bitcoin ETF.
As part of the filing, there’s an open review period, where anyone can submit comments to the SEC for consideration. So far over 2,600 comments have been submitted from investors like you. If you believe – like we do – that the SEC should approve a spot-based Bitcoin ETF, we hope you will consider emailing your thoughts to the SEC: