Grayscale will sue SEC for a spot Bitcoin ETF
A long battle awaits Grayscale in an attempt to bring its spot Bitcoin ETF to US investors. The SEC has thus far balked at this type of ETF.
The Securities and Exchange Commission (SEC) last week rejected Grayscale’s application to turn its Bitcoin trust into a spot Bitcoin exchange-traded fund. It would have been the first ETF of that type approved by US regulators.
But Grayscale is fighting back.
Grayscale filed a lawsuit against the SEC asking the US Court of Appeals for the District of Columbia Circuit to review the SEC’s order.
Last year the SEC approved the first futures Bitcoin ETFs, which track the price of Bitcoin using futures contracts. That spurred hope that spot Bitcoin ETFs, owning actual Bitcoin, would follow. So far the SEC has balked, citing lack of crypto regulation. ETF applications from Fidelity, First Trust and SkyBridge Capital were rejected in the past few months.
Many in the crypto industry hope that approval for a Bitcoin spot ETF would help the cryptocurrency escape its “crypto winter” slump, given that new funds would flow in and be used to buy Bitcoin.
For more on Bitcoin-based ETFs, read our guide.
The Grayscale argument
A spot Bitcoin ETF’s price would be based on the price of Bitcoin itself, while the futures-based ETFs are priced based on the price of regulated Bitcoin futures. In theory, the prices are the same.
And that is one of the major reasons Grayscale argues in the suit that the SEC should reconsider.
“If regulators are comfortable with ETFs that hold derivatives of a given asset, they should logically be comfortable with ETFs that hold that same asset,” Grayscale noted in a letter to Investors.
“The SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934,” said Donald Verrilli, Jr., Grayscale Senior Legal Strategist and former US Solicitor General.
Why the SEC balked
The SEC rejected the Grayscale Bitcoin trust’s proposed conversion to a spot Bitcoin ETF saying Grayscale and NYSE Arca had not adequately shown the fund is designed to prevent fraudulent and manipulative acts.
Specifically, the SEC was concerned about the role of Tether in the broader Bitcoin ecosystem and the lack of a surveillance-sharing agreement between a “regulated market of significant size” and a regulated exchange.
Tether is a US dollar stablecoin that is ostensibly backed by hard assets and locked to a price of $1. But there have been some controversies about the assets used to back it.
Long battle ahead
James Seyffart of Bloomberg Intelligence tweeted an estimated timeline for the resolution of the Grayscale lawsuit. He believes a court ruling would come by the end of 2023 or the beginning of 2024.
Assuming $GBTC is denied, it looks like Grayscale is going to file an APA lawsuit. My colleague and litigation analyst @NYCStein lays out the potential timeline. We expect the suit to be filed very quickly but the whole process is likely to take 12 to 18 months. 2/x pic.twitter.com/sFfyNJwpox
— James Seyffart (@JSeyff) June 29, 2022
If the lawsuit helps Grayscale get a Bitcoin spot ETF for US investors, it could be the first of many. That could potentially unlock billions of dollars of investor capital, raising the price of the cryptocurrency and spurring improved crypto regulation.
But by the time the lawsuit is resolved, the whole macroeconomic landscape will likely change. And with other Bitcoin ETFs awaiting an SEC ruling, an approval for one of those might come first.
Kliment Dukovski owns cryptocurrencies as of the publishing date.