- Grayscale is challenging the SEC’s decision to reject its application for a spot bitcoin ETF, claiming arbitrary and discriminatory treatment of Bitcoin ETFs.
- Grayscale points to the recent approval of the volatile and risky Volatility Shares 2x Bitcoin Strategy ETF as evidence of the SEC’s inconsistent approach.
- The SEC defends its decisions by saying that it focuses on the rules designed to prevent fraudulent and manipulative acts under the Exchange Act.
Crypto asset management firm Grayscale is standing its ground against the United States Securities and Exchange Commission (SEC), challenging what it perceives to be discriminatory treatment of Bitcoin Exchange Traded Funds (ETFs). The firm recently launched an appeal against the SEC’s decision to reject its application to convert the Grayscale Bitcoin Trust (GBTC) into a spot bitcoin ETF.
In a letter submitted to the U.S. Court of Appeals for the District of Columbia Circuit, Grayscale highlights the SEC’s recent approval of the risky Volatility Shares 2x Bitcoin Strategy ETF (BITX) as evidence of the SEC’s inconsistent and potentially unfair approach towards bitcoin ETFs. Despite being riskier and more volatile, the leveraged bitcoin futures ETF has been allowed to trade, while spot bitcoin ETFs, such as the one Grayscale proposed, continue to face regulatory blockades.
Grayscale’s lead counsel, Donald B. Verrilli Jr., argues that “the Commission continues to arbitrarily treat spot bitcoin ETPs differently than bitcoin futures ETPs.” As proof, Grayscale points to the fact that BITX, a relatively new and volatile ETF, has already accumulated $15 million in assets under management in just two weeks. This leaves market watchers and investors perplexed about how such a risky ETF can be considered acceptable for investors, while a spot bitcoin ETF is deemed not suitable, seemingly contradicting the SEC’s mandate to protect investors.
SEC’s Counter Arguments and Market Reactions
To justify its stance, the SEC has emphasized that it examines a list of requirements under the Exchange Act and evaluates whether spot bitcoin ETFs meet these standards. The risk profile of a spot bitcoin ETF versus a leveraged bitcoin futures ETF is not the primary concern. Instead, the rules of a national securities exchange must be designed to prevent fraudulent and manipulative acts and practices. If a filing doesn’t meet these requirements, it must be disapproved.
This justification, while logical from the SEC’s viewpoint, has invited disagreement from many quarters. Detractors question the SEC’s interpretation of the requirements and criticize its inconsistent application to spot bitcoin ETFs. This argument has found a strong advocate in Grayscale, which posits that the SEC’s inconsistent treatment of similar investment vehicles constitutes a violation of the Administrative Procedure Act and Securities Exchange Act of 1934.
Implications for the Future of Bitcoin ETFs
This case is more than just a legal tussle between Grayscale and the SEC. It represents a larger dialogue about the future of Bitcoin ETFs and their place in the traditional financial ecosystem. In approving the Volatility Shares ETF, which is perceived to be riskier than standard Bitcoin futures ETFs, the SEC may have set a precedent that encourages the emergence of more such products.
Grayscale argues that if the SEC permits even a leveraged bitcoin futures ETF, it should reconsider its rejection of spot bitcoin ETFs, which, in many ways, could offer less risk to investors. Whether or not the SEC changes its stance on this issue could have significant implications for investor choice, the evolution of Bitcoin products, and the broader integration of cryptocurrency into the world of mainstream finance.
