Grayscale Is Preparing to Sue the SEC Over a Bitcoin Spot ETF

The Grayscale Bitcoin Trust, which currently owns $38 billion in bitcoin, has written a pre-action letter to the SEC stating that the SEC’s decision to approve a futures ETF but not a spot bitcoin ETF is “arbitrary and capricious.” Grayscale’s Vice President of Legal, Craig Salm, stated:

“Last night, our lawyers at Davis Polk wrote a letter to the SEC saying that the SEC’s approval of Bitcoin futures-based ETFs, but not Bitcoin spot-based ETFs, such as $GBTC, is’arbitrary and capricious,’ and so violates the Administrative Procedure Act (APA).

This is a novel argument in the context of $BTC ETFs that was not viable until the first Bitcoin futures-based ETF was approved and another spot-based ETF was rejected. What is this new argument, then?

The APA compels the SEC to handle similar circumstances similarly unless there is a legitimate justification for treating them differently. This implies that the SEC must apply the same standard to similarly located investment products.

Bitcoin ETF products — Bitcoin futures-based ETFs registered under the ’40 Act and Bitcoin spot-based ETFs registered under the ’33 Act — are an illustration of two similar circumstances that should be handled similarly… but no longer are.

Arguments that the ’40 Act provides more safeguards above the ’33 Act, or that CME bitcoin futures are more’regulated’ than spot bitcoin, are misguided in light of the Bitcoin ETF approvals.”

The Securities and Exchange Commission’s (SEC) decision to allow futures bitcoin ETFs but not spot has created an odd situation in which derivatives, such as futures, are considered a safer investment than holding the underlying asset directly, contrary to long-held beliefs that derivatives are inherently riskier.

They’re riskier since they often include leverage, and because you can’t store a derivative, you’re forced to terminate the contract at the end of each month and purchase a new one, which may result in losses of up to 30% above the spot asset.

Grayscale has been put in an even more difficult situation since the loophole that permits accredited investors to publicly list bitcoin shares requires that the shares be retained for six months.

This time may result in a substantial discount or premium, which may be worsened by competition from a free floating bitcoin futures etf.

However, the first such ETF, BITO, has just $1 billion in assets, since investors are more comfortable with a spot ETF, especially one with redeemable shares in real bitcoin.

Thus, Grayscale may be more concerned with competition from Europe, where four spot cryptocurrency ETPs began this week. Thus, Americans may go to Europe digitally rather than by Grayscaling, which may aggravate GBTC’s discount.

As this area evolves and professionalises, Grayscale is likely to have no option but to pursue it in court if necessary, and so is able to pursue all legally accessible paths.

If it comes to that, the flourishing crypto stock market in Europe would serve as compelling proof in court of the SEC’s arbitrary decision-making, which is likely attributable in large part to the fact that its current chief, Gary Gensler, is a former Goldman Sachs banker.

Thus, a bitcoin spot ETF is almost certainly on the way, as the crypto industry now turns its attention, following much debate, to fighting the SEC in the Ripple case, with some suggesting putting the SEC on trial, while Terra has sued the SEC after its co-founder, Do Kwon, was publicly served in a “intimidating and humiliating manner.”

As a result, with communication with the stock regulator now halted owing to a lack of confidence, the crypto sector is now doing what it should have done years ago: bringing that ‘dialogue’ to court.

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