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Thursday, April 18, 2024

Did Grayscale Bend the Knee? S-3 Bitcoin ETF Amendment After Silbert’s Exit Sparks Questions

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Grayscale has submitted a modified S-3 filing for the conversion of its GBTC into a spot Bitcoin ETF on the same day of its surprising leadership shuffle.

The asset manager reportedly reached a compromise by agreeing to adhere to the US Securities and Exchange Commission’s (SEC) stipulation for cash-only creation and redemption.

Grayscale’s Compromise Stirs Debates

Grayscale has made multiple revisions to its 2018 filing. In November, two alterations were suggested. The initial one changed the fee collection method from a monthly to a daily structure. The second adjustment involved the modification of how assets are combined in an omnibus account, aiming to streamline the creation and redemption of shares.

According to Bloomberg’s James Seyffart, Grayscale seems to be acquiescing to the SEC’s requirement for cash-only orders in its recently amended S-3 filing. Seyffart believes the asset manager is “bending the knee” to comply with the SEC’s directive.

The ongoing dispute between asset managers seeking to launch a spot Bitcoin ETF and the SEC revolves around the contrasting approaches of cash and in-kind creations. While the majority of stock and commodity-based ETFs operate on an in-kind model, enabling direct handling of the fund’s assets by market participants, a cash-creation model restricts the creation or redemption of new shares in a spot Bitcoin ETF to cash transactions alone.

The SEC’s decision to prohibit broker-dealers from directly engaging with Bitcoin is perceived as an effort to enhance tracking of BTC movements from exchanges and to mitigate potential risks related to anti-money laundering or Know Your Customer compliance.

Finance Lawyer Scott Johnson highlighted the issue of in-kind creation/redemption in the context of the SEC’s rulemaking for digital asset safekeeping and said the amended S-3 sheds light on the challenge posed by the regulator’s reluctance to approve amendments allowing in-kind processes despite assertions from broker-dealers and exchanges that compliance is feasible.

This regulatory stance, seemingly aimed at investor protection, paradoxically results in reduced safeguards as Grayscale seeks approval for a novel cash-based approach in contrast to the industry norm of in-kind models for spot commodity ETFs, introducing a new layer of uncertainty for investors, according to Johnson. He further added,

“Gary has twisted the SEC’s crypto regime into a knot where it simultaneously allows and disallows its existence via some Rube Goldberg-ian mess, and courts are forced to intervene every so often to reconcile the stupidity. But rest assured, no guidance needed. All very clear.”

Barry Silbert’s Resignation

On the other hand, Barry Silbert’s exit may considerably favorably impact the odds of Grayscale’s successful transformation of the GBTC into a spot Bitcoin ETF.

Adam Cochran, a partner at Cinneamhain Ventures, suggests that Silbert’s decision to resign was undoubtedly an agreement between the asset manager and the SEC, strategically coordinated before the approval of the conversion request.

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