SEC Rejects Grayscale’s Spot Bitcoin ETF Application

Grayscale Investments’ application to convert its $13.5 billion Grayscale Bitcoin Trust (GBTC) into a spot-based bitcoin exchange-traded fund (ETF) was denied by the Securities and Exchange Commission on Wednesday despite the company’s extensive efforts to win approval.

Grayscale is owned by Digital Currency Group, which is also the parent company of CoinDesk.

The SEC stated in its decision that the application failed to answer the SEC's questions about preventing market manipulation, as well as other concerns.

The decision joins the SEC’s rejection on Wednesday of Bitwise’s application for approval of a spot bitcoin ETF, which is comprised of bitcoin or assets related to bitcoin's price.

Like Bitwise, Grayscale initially filed its application in October but the decision was delayed multiple times as the SEC requested additional information and comment from the public. The final deadline for the SEC to render a decision on Grayscale’s application was July 6.

Proponents of a spot bitcoin ETF approval have argued the product would offer a low-cost and easily accessible way for individuals and institutions to invest in bitcoin. Optimism about an approval began to grow following the approval of several bitcoin futures-based ETFs last fall, and then that of two more futures ETF approvals earlier this year based on the Securities Exchange Act of 1934, the same act under which spot bitcoin ETFs have been filed.

For its part, Grayscale has argued forcefully that it is inconsistent to approve an ETF based on bitcoin futures but not allow one based on the underlying investment.

Some of its efforts have included marketing to urge members of the public to voice their support to the SEC, a May meeting with the SEC and the strengthening of its legal team with the addition of Donald B. Verrilli Jr., who previously served as a solicitor general in the Obama administration.

The denial comes as a blow not only to Grayscale, but for the broader crypto industry after a long campaign in hopes of proving to the SEC the product contained sufficient investor protections.

Few analysts and observers were anticipating an approval, however, noting that SEC Chair Gary Gensler has been consistent in wanting to see more oversight of crypto exchanges before approving a spot bitcoin ETF.

Investors and crypto observers will now turn their focus to what Grayscale can and will do now to win approval for a conversion. CEO Michael Sonnenshein said on June 27 the company will be “preparing for all possible post-ruling scenarios.” And on that same date, Grayscale said it would be working with market makers Jane Street and Virtu Financial to help convert GBTC into an ETF if its application was approved.

GBTC was trading at an approximate 29% discount to net asset value ahead of the denial, down from 34% a week prior.