GBTC will retain the same stock code (GBTC) and the same CUSIP, and investors will continue to be able to buy and sell GBTC stocks at public market prices.

Source: Grayscale

Compiled by: BitpushNews Mary Liu

At Grayscale, we believe that the approval of a spot Bitcoin ETF by US regulatory agencies is a matter of "when" rather than "if."

We remain focused on listing GBTC as a spot Bitcoin ETF on NYSE Arca. While the timetable is inherently uncertain, looking ahead, we sat down with Grayscale's Chief Legal Officer Craig Salm and Chief Financial Officer Edward McGee to address some common questions from investors and other market participants about the process and impact of products like GBTC being listed on a securities exchange, including the process of listing GBTC on NYSE Arca and what it means for investors for GBTC to be traded as an ETF.

Q: First, can you give us an overview of how ETFs generally operate?

A: An ETF is an investment product whose stocks are traded on national securities exchanges (such as NYSE Arca, Nasdaq, or CBOE). ETFs can conduct both share creation and redemption, aiming to allow ETF shares to trade based on the value of their underlying assets or holdings (commonly referred to as net asset value or NAV).

Market participants known as authorized participants (APs), primarily broker-dealers with certain qualifications such as banks or trading firms, are incentivized to create ETF shares when their stock trading price is higher than the ETF's net asset value, or to redeem ETF shares when their stock trading price is lower than the ETF's net asset value.

APs are typically the only market participants able to conduct these types of transactions with ETFs. These creation and redemption transactions give APs the opportunity to profit through this arbitrage mechanism, which is a measure to ensure that the ETF tracks the value of its underlying assets. ETFs that closely track their net asset value can also incentivize non-AP broker-dealers and investors to trade stocks on the public market without creating or redeeming stocks. The higher the liquidity of ETF shares, or the higher the availability and trading volume, the less reliance there is on creation and redemption transactions.

Q: How does GBTC currently operate?

A: GBTC is an investment trust company that holds over 3% of the current circulating supply of Bitcoin. As of November 29, 2023, each share of GBTC is backed by 0.0008968 BTC. GBTC holds nothing other than Bitcoin and does not use leverage or derivatives such as Bitcoin futures contracts; the underlying Bitcoin tokens are held in secure offline storage. Grayscale is responsible for overseeing the daily management of GBTC, including managing custody relationships, communicating with regulatory agencies, tax reporting, financial statements, and other requirements for publicly traded investment vehicles.

GBTC shares have historically been issued through a private placement process, which, under the 1933 Securities Act, does not require registration. As a result, such shares were initially only available to accredited investors and were subject to holding periods under Rule 144, and GBTC shares are not redeemable. To provide liquidity, GBTC obtained public quotation on the OTCQX market in mid-2015. Since then, any investor able to access the public market has been able to buy and sell freely tradable GBTC shares, allowing them to increase their investment in Bitcoin in their investment accounts.

However, due to Rule 144, newly created shares must go through a holding period, and if the trading price of GBTC shares on OTCQX is higher than GBTC's net asset value, APs cannot create more shares to immediately add them to the market and readjust the price based on GBTC's net asset value. Conversely, since GBTC also does not offer a redemption program, if the trading price of GBTC shares is lower than GBTC's net asset value, APs cannot redeem shares to remove them from the market and readjust the price based on GBTC's net asset value. Therefore, GBTC cannot rely on the inherent arbitrage mechanism of ETFs described earlier. GBTC shares can and have been traded at a premium or discount to the net asset value.

The innovation of the ETF product structure lies in its arbitrage mechanism, which can continuously create or redeem shares to address premiums and discounts.

Importantly, in the ETF model, it is expected that GBTC shares will more closely track the price of Bitcoin, meaning that any premium or discount in the price of GBTC shares is expected to disappear. As of November 29, 2023, GBTC's assets under management are $23.4 billion, with a trading discount of 8.09%, or $1.89 billion. This means that if the current discount disappears and GBTC is listed on NYSE Arca and becomes an ETF, it will release approximately $1.89 billion in value to investors through the arbitrage mechanism.

Q: If the SEC grants regulatory approval to allow spot Bitcoin ETFs to enter the US market, what will happen to GBTC?

A: The creation of GBTC shares will be registered with the SEC through an S-3 form under the 1933 Securities Act. The redemption of GBTC shares is expected to be exempt under the M exemption previously granted by the SEC for products with similar characteristics. This will provide GBTC with the necessary approvals for both creation and redemption, allowing for arbitrage opportunities when there is a premium or discount between the price of GBTC shares and GBTC's net asset value, enabling GBTC to more closely track the value of its underlying asset, Bitcoin. Once the SEC approves NYSE Arca's 19b-4 rule application, GBTC will also upgrade from OTCQX to NYSE Arca.

GBTC has long been prepared to operate as an ETF. Upon obtaining the appropriate regulatory approval, Grayscale will immediately work with our partners to list GBTC on NYSE Arca.

Q: If the SEC approves spot Bitcoin ETFs and allows GBTC to be listed on NYSE Arca, what do GBTC investors need to do?

A: GBTC investors do not need to take any action. When investors view their holdings of GBTC shares after they are listed on NYSE Arca, they will only see these shares listed on NYSE Arca, not quoted on OTCQX. GBTC will retain the same stock code (GBTC) and the same CUSIP, and investors will continue to be able to buy and sell GBTC stocks at public market prices.

Q: What tax implications should I be aware of when GBTC upgrades to NYSE Arca?

A: There will be no taxable event when GBTC is listed on NYSE Arca.

Q: Is there a timetable for when GBTC will be approved to list on NYSE Arca?

A: Unfortunately, no. Despite a favorable ruling for Grayscale against the SEC in a lawsuit in August 2023, which overturned the SEC's decision to reject NYSE's 19b-4 application to list GBTC on NYSE Arca, this unprecedented situation means that the timetable is inherently uncertain. The Grayscale team is committed to constructive cooperation with the SEC to list GBTC on NYSE Arca and will continue to share updates in a timely manner as more information becomes available.

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