Grayscale has a 40% chance of winning vs. the SEC

This one’s for all the marbles. Grayscale, the manager of a trust that owns more than 3% of the world’s Bitcoin, is going before three judges in Washington, D.C., on Tuesday to argue the Securities and Exchange Commission wrongly denied its application to convert the trust to an ETF.

If the company loses, it will see the price of the trust’s shares—which are already trading more than 40% below the price of their underlying Bitcoin—tumble even further, and amount to an existential event for Grayscale and its parent company, DCG. But if Grayscale wins, the company and Bitcoin itself will get a major boost, while knocking the SEC chair, Gary Gensler, on his heels at a time when he is waging a scorched earth battle against crypto.

According to Bloomberg Intelligence, Grayscale has a 40% chance of winning. That more or less jibes with what I’ve heard from several lawyers who don’t have a dog in this fight. The reason has to do with a principle in administrative law that says, in judge-speak, that agencies like the SEC can’t behave “arbitrarily and capriciously” when it comes to making decisions.

Grayscale argues that’s precisely how the SEC behaved when it rejected its ETF petition. And frankly, the company is right. If you’re unfamiliar, Grayscale created its trust way back in 2013 when Bitcoin was much smaller and harder to buy, especially if you were an institution. This soon let anyone buy Bitcoin in the form of shares on the OTC market with Grayscale collecting a stiff 2% annual fee—an arrangement that was an expensive, jerry-rigged solution but that served its purpose in an earlier era of crypto.

Grayscale itself has tacitly acknowledged that buying shares of a trust in order to hold Bitcoin is an outdated model and, in recent years, has been asking the SEC to flip the trust into an ETF. ETFs are a safe, inexpensive, and very common way of holding assets like gold or a stock market’s index, and regulators in Canada and Europe have already approved successful crypto ETFs. The SEC, however, keeps rejecting petitions to create the same thing in the U.S. on the specious grounds that a crypto ETF could somehow be manipulated—a highly improbable argument given that Bitcoin is diffusely held across the globe with a market cap of nearly half a trillion dollars. Meanwhile, the agency has agreed to bless a Bitcoin futures ETF, a much more complicated and expensive product.

The SEC chair’s decision to deny the Grayscale ETF is, well, arbitrary and capricious—especially given his broader recent attack on everything crypto-related. And the SEC is especially vulnerable to a judicial smackdown in light of a recent Supreme Court ruling that reduced the deference judges must show to specialized agencies.

The long and short of it is Grayscale has the better legal argument. So why are the odds only 40% the company will win? Well, first off, consider recent events. The financial carnage caused by Sam Bankman-Fried’s massive fraud and other scams means anything related to crypto is radioactive in the eyes of many people. It also doesn’t help that most judges are in their sixties or older, and are not known for keeping up with blockchain or any other new technology. Put that together, and there is a good chance the three judges who will decide Grayscale v. SEC are disposed to view the company with suspicion.

All the same, 40% is pretty close to a jump ball. So don’t be surprised if the court’s ruling, which should come by the end of summer, favors Grayscale.

Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts

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