Grayscale has failed to convince the Securities and Exchange Commission (SEC) to accept its spot Bitcoin ETF application. Following months of negotiations and campaigning to kindly persuade regulators, the fund will now take legal action against the commission.
Why the Rejection?
According to the SEC’s filing on Wednesday, Grayscale failed to prove that its product could protect investors, or prevent market manipulation.
“As the Commission has explained, an exchange that lists bitcoin-based ETPs12 can meet its obligations… by demonstrating that the exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets,” it reads.
Grayscale would have needed to enter a “surveillance sharing agreement” with another “significant market” that could influence Bitcoin’s price. If not, they needed to prove that Bitcoin, as an underlying asset, was “uniquely” or “inherently” resistant to such manipulation.
The fund attempted to argue both cases. Firstly, it cited the CME Bitcoin futures market as a surveilled market from which it can collect manipulation data. Secondly, it claimed that Bitcoin as an asset offers “novel protections beyond those that exist in traditional commodity markets.”
However, the commission determined that Grayscale had met neither criteria. On one hand, it determined that wash traders and Bitcoin whales could, theoretically, manipulate Bitcoin’s price. On the other, the Commission does not recognize the CME as an adequate market for shared surveillance that is “related to spot Bitcoin”.
The SEC emphasized that its rejection was not related to members’ personal views on Bitcoin’s quality as an investment product. Instead, it was strictly related to Grayscale’s inability to meet certain requirements under the exchange act.
Heading Straight to Court
As the firm’s senior legal strategist argues, the SEC is “failing to apply consistent treatment to similar investment vehicles.” This theoretically places it in violation of the Administrative Procedure Act and Securities Exchange Act of 1934.
“Through the ETF application review process, we believe American investors overwhelmingly voiced a desire to see GBTC convert to a spot Bitcoin ETF, which would unlock billions of dollars of investor capital while bringing the world’s largest Bitcoin fund further into the U.S. regulatory perimeter,” said Grayscale CEO Michael Sonnenshein on the matter.
On Monday, Sonnenshein sent a preemptive letter to investors stating that Grayscale was prepared for any response from the SEC. By that time, investors had already flooded the commission with over 11,000 letters signaling support for a spot ETF transition.