Grayscale: SEC broke law rejecting Bitcoin (BTC) spot ETF applications

Wed 01 Dec 2021 ▪ 17h19 ▪ 4 min read — by Susan McCormack

Grayscale Investments LLC, a digital currency investing services company, argues that the US Securities and Exchange Commission (SEC) is breaking the law by rejecting Bitcoin (BTC) spot ETF while approving its futures analogues.

The SEC holds ground

Digital currency investing services company Grayscale has written a letter to the SEC saying that the regulator’s policy on spot and futures BTC ETFs violates the law.

“Doing so not only would be fundamentally unfair to BTC and its shareholders, but would violate the Section 6(b)(5) injunction against unfair discrimination among issuers, and constitute arbitrary and capricious administrative action in violation of the APA [Administrative Procedures Act].”

Crypto News Flash reports that Grayscale finds discriminative the fact that the US Securities and Exchange Commission has adopted three BTC ETFs in 2021, yet rejected all spot ETFs. The SEC was accused of electing favourites and treating spot applications with bias subjecting them to “a different, vague and evidently impossible-to-meet standard.”

The Commission based its rejections on the fine difference between the spot and futures ETFs laws. Both are governed primarily by the Securities Act of 1933, but the futures ETF has the additional oversight of the Company Act of 1940. SEC Chair Gary Gensler made it clear that the extra oversight was a key reason why the one ETF had been approved and the other rejected.

Grayscale has suggested that the Company Act applies only to the issuer of the ETF, creating an opportunity for the SEC to oversee the product management, however, the regulator itself has never referred to such an opportunity rejecting applications right off the bat.

“Regarding the claim that the ‘40 Act has increased investor protections, I’d highlight that this law does not address fraud or manipulation in the assets or markets of assets that ETFs hold. […] The ‘40 Act even explicitly lists out the types of abuses it seeks to prevent, and places certain restrictions on ETFs related to accounting, borrowing, custody, fees, and independent boards, among others,” Craig Salm, Grayscale’s Head of Legal, wrote in a blog post commenting on the SEC’s ETF policy.

“Someone could, in theory, manipulate Bitcoin (BTC) on a spot exchange and have it impact the regulated CME Bitcoin Futures and, therefore, the futures-based ETF too. (Again, assuming you believe fraud or manipulation exists in the first place),” the lawyer further pointed out.

“As it stands, the Bitcoin ETF landscape is unfair and discriminatory against GBTC shareholders and all of the other US investors looking for an accessible and efficient way to gain their Bitcoin exposure,” Craig concluded.

It all comes down to the fact that despite BTC spot ETFs being similar to futures ETFs tracking the same underlying asset, the SEC still believes spot BTC ETFs to be subject to manipulation.

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Susan McCormack

How many crypto nerds does it take to fork an altcoin? I may be a failed comedian, but crypto is no joke! I want to share my knowledge and help others to see the bright future ahead. #buybitcoin

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The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.

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