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Grayscale Sues SEC Over Bitcoin ETF Application Rejection
The SEC rejected Grayscale's application to convert its Grayscale Bitcoin Trust to an exchange-traded fund earlier Wednesday.
By Nikhilesh De
Updated May 11, 2023, 6:23 p.m. Published Jun 30, 2022, 1:25 a.m.
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Grayscale Investments filed suit against the U.S. Securities and Exchange Commission (SEC) barely an hour after the regulatory agency rejected its application to convert its flagship Grayscale Bitcoin Trust product to an exchange-traded fund (ETF).
The SEC rejected Grayscale's application earlier Wednesday, citing concerns about market manipulation, 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, echoing concerns the regulator has expressed for years in rejecting other spot bitcoin ETF applications.
STORY CONTINUES BELOW
A spot bitcoin ETF is comprised of bitcoin or assets related to bitcoin's price. Grayscale is a subsidiary of CoinDesk parent company Digital Currency Group.
In the filing, Grayscale simply asks the U.S. Court of Appeals for the District of Columbia Circuit to review the SEC's order.
Read more: SEC Rejects Grayscale’s Spot Bitcoin ETF Application
The investment firm announced earlier in 2022 it was prepared to sue the SEC in the event of a rejection, saying it would file a proceeding under the Administrative Procedures Act. To that end, Grayscale tapped former Solicitor General Don Verrilli, who has experience in APA proceedings.
“Grayscale supports and believes in the SEC’s mandate to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation – and we are deeply disappointed by and vehemently disagree with the SEC's decision to continue to deny spot bitcoin ETFs from coming to the U.S. market,” Grayscale CEO Michael Sonnenshein said in a statement Wednesday.
Essentially, the company will argue that the SEC has to allow products that are like other products already trading, in this case bitcoin futures ETFs.
Verrilli told reporters earlier in June that the SEC's approval of futures ETFs indicate the underlying market must be seen as reliable.
"This is a place where common sense has a really important role to play. You've got a situation now in which you have certain kinds of exchange traded funds, one that is focused on bitcoin futures, and the SEC has approved that, the SEC is given it the seal of approval," he said. "In order to do so it had to make a determination that that giving this approval was consistent with the securities laws, and in particular, that that there wasn't a sufficient underlying risk of fraud and manipulation."
To date, only a handful of bitcoin futures ETFs have been approved to trade. Spot bitcoin ETFs trade based on the price of bitcoin itself, while futures-based ETFs trade based on the price of CME's bitcoin futures product (which in turn is tied to an index). Bitcoin ETF proponents argue that the futures markets are still based on the underlying spot bitcoin price, while the SEC notes that CME's futures market is regulated by the Commodity Futures Trading Commission (CFTC), a fellow federal agency.
UPDATE (June 30, 2022, 02:15 UTC): Adds Grayscale's petition.
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White House crypto advisor Patrick Witt said stablecoins are the “gateway drug” for global finance and that Washington is racing to deliver regulatory clarity.
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The Context: The Executive Director of the President’s Council for Advisors for Digital Assets sat down for an interview with CoinDesk where he said the recent World Economic Forum in Davos served as a stage for the Trump administration to signal its commitment to normalizing digital assets as a permanent asset class. He said:
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- Consumers benefit from this competition, positioning the current administration as firmly on the side of technological innovation.
- The President renewed a pledge at the event to establish the United States as the undisputed "crypto capital of the world".
Latest Developments: Regulatory movement is accelerating in Washington with key committee markups scheduled for major digital asset legislation.
- The Senate Agriculture Committee is set to mark up its portion of the market structure bill on Thursday, January 29th at 10:30 AM.
- The Senate Banking Committee has postponed its markup, requiring further mediation on issues like stablecoin rewards and ethics.
- Witt expressed confidence that despite these delays, the legislation will eventually be reconciled and brought to the Senate floor.
Reading Between the Lines: Stablecoins are acting as a "gateway drug" for global business leaders who are beginning to grasp the technology's potential—and its threat.
- Witt observed a cycle where traditional players move from a lack of understanding to fear, and finally to incorporating crypto into their own product offerings.
- While some Senate Republicans worry about stablecoins causing deposit flight from community banks, Witt believes a "smooth glide path" into these future technologies is possible with patience and cooperation.
- “Consumers win when there’s choice,” he said, while also acknowledging concerns from Senate Republicans about community banks and financial stability. The administration, he suggested, sees convergence between crypto and traditional finance as inevitable but wants the transition to be smooth rather than destabilizing to all parties.
- U.S. regulators intend to lead the global regulatory conversation, even if the domestic legislative process results in imperfect "directionally accurate" rules.
What Comes Next: Once the primary market structure bill passes, the administration plans to pivot toward a major crypto tax package.
- Witt suggested there is still a window of opportunity to pass additional digital asset legislation this year before midterms dominate the congressional calendar.
- The administration is also monitoring "developing situations" regarding digital assets potentially seized in national security actions abroad, such as in Venezuela.
- Finally, Witt declined to specifically comment on speculation that Venezuelan enforcement actions may have involved seized digital assets, citing national security sensitivities and an evolving situation, but did add, “There’s a number of folks in the national security apparatus engaged,” in regards to how the Maduro regime was financed.
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