At Grayscale, we believe that U.S. regulators' approval of spot Bitcoin ETFs is."When"The problem instead of".But".
We remain focused on listing GBTC as a spot Bitcoin ETF on NYSE ARCA. While the timeline is inherently uncertain, looking ahead, we sat down with Grayscale's Chief Legal Officer Craig Salm and Chief Financial Officer Edward McGee to answer some common questions from investors and other market participants about the process and impact of listing products like GBTC on **exchanges, including the process for listing GBTC on NYSE ARCA, and what GBTC means for investors as an ETF.
Q: First of all, can you give us an overview of how ETFs work in general?
A: An ETF is an investment product that is traded on a national exchange such as NYSE ARCA, NASDAQ, or CBOE. ETFs are able to add to and redeem shares at the same time, with the aim of having the ETF's shares traded at the value of its underlying asset or holding, often referred to as net asset value or n**.
Market participants known as Authorized Participants (APs) (primarily broker-dealers, such as banks or trading firms with certain registered credentials) are incentivized to create ETFs when their **trades** are higher than the ETF's NAV, or when their **trades** are below the ETF's NAV, they are incentivized to redeem ETFs**
APs are often the only market participants who can make such transactions with ETFs. These creation and redemption transactions give APs the opportunity to earn profits through this arbitrage mechanism, which is an incentive to ensure that ETFs track the value of their underlying assets. ETFs that closely track their net worth can also incentivize non-AP brokers and investors to buy and sell on the open markets** without having to create or redeem**. The higher the liquidity of ETF shares, or the higher the free access and trading volume, the less reliance there is on creation and redemption transactions.
Q: How does GBTC work today?
A: GBTC is an investment trust that owns more than 3% of the total amount of Bitcoin currently in circulation. As of November 29, 2023, GBTC per share increased by 00008968 BTC support. GBTC doesn't own anything other than Bitcoin, GBTC doesn't use leverage or use derivatives like Bitcoin** contracts, and the underlying Bitcoin tokens are kept in secure offline storage. GrayScale oversees the day-to-day management of GBTC, including managing custody relationships, communications with regulators, tax reporting, financial statements, and other requirements for publicly traded investment vehicles.
Historically, GBTC ** has been issued through a private placement process, which is not required to be registered under the ** Act of 1933, so such ** is initially only open to accredited investors and is subject to the holding period set out in Section 144, and GBTC** is not redeemable. To provide liquidity, GBTC became publicly available on the OTCQX market in mid-2015**. Since then, any investor with access to the open market will be able to buy and sell freely tradable GBTC**, allowing them to increase their investment in Bitcoin in their investment account.
However, due to Rule 144, newly created ** must go through a holding period, and if GBTC **trades** on OTCQX **above GBTC's NAV, AP cannot create more** to immediately add it to the market and rebalance it according to GBTC's NAV** Conversely, since GBTC does not offer a redemption plan, if GBTC's **transaction **is lower than GBTC's NAV, AP cannot redeem** to remove it from the market and be based on GBTC's net asset value has been rebalanced**. As a result, GBTC cannot rely on the arbitrage mechanism inherent in ETFs as described earlier. GBTC** can and has been traded at a premium and discount to its NAV.
The innovation of the ETF product structure is that it has an arbitrage mechanism, which can continuously add or redeem shares to solve the premium and discount.
Importantly, in the ETF model, GBTC's shares are expected to track Bitcoin's more closely, meaning that any premium or discount to GBTC's share price is expected to disappear. As of November 29, 2023, GBTC had $23.4 billion in assets under management and traded at a discount of 8.09%, i.e. 18$900 million. This means that, assuming the current discount disappears, GBTC will release about 18. for investors through an arbitrage mechanism once it is listed on NYSE ARCA and becomes an ETF$900 million in value.
Q: What would happen to GBTC if the SEC gave the appropriate regulatory approvals to allow spot Bitcoin ETFs to enter the US market?
A: The creation of the GBTC will be registered with the SEC under the Act 1933 through a registration statement on the S-3. The redemption of GBTC ** is expected to take place in accordance with the Regulation M exemption previously granted by the SEC for products with similar characteristics. This will provide GBTC with the necessary approvals to create and redeem at the same time, providing arbitrage opportunities in the event of any premium or discount between the GBTC share price and GBTC's net asset value, allowing GBTC to track the value of its underlying asset, Bitcoin, more closely. Once the SEC approves NYSE ARCA's Rule 19B-4 application, GBTC will also be upgraded from OTCQX to NYSE ARCA.
GBTC is ready to operate as an ETF for a long time. Grayscale will work with our partners to list GBTC on NYSE ARCA as soon as the appropriate regulatory approvals are obtained.
Q: What do GBTC investors have to do if the SEC approves a spot Bitcoin ETF and allows GBTC to list on NYSE ARCA?
A: GBTC investors do not have to take any action. When investors look at their GBTC holdings after NYSE ARCA's listing, they will only see these **listed on NYSE ARCA, not on OTCQX, GBTC will retain the same***GBTC) and the same CUSIP, and investors will continue to be able to buy and sell GBTC on the open market**
Q: What are the tax implications when upgrading GBTC to NYSE ARCA?
A: No. GBTC's listing on NYSE ARCA's will not constitute a taxable event.
Q: Is there a timeline for when GBTC will be allowed to land on NYSE ARCA?
A: Unfortunately, no. This is despite the D.C. Circuit's ruling in favor of Grayscale in the August 2023 lawsuit against the SEC, which reversed the SEC's decision to deny NYSE's 19B-4 petition to list GBTC to NYSE Arca. This is an unprecedented situation, and the timeline is inherently uncertain. The GrayScale team is committed to working constructively with the SEC to elevate GBTC to NYSE ARCA, and will continue to share timely updates as more information becomes available.
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