Grayscale Replies to SEC, Argues That Bitcoin (BTC) Spot ETF Denial Is Illogical

Crypto hedge fund Grayscale is telling the U.S. Securities and Exchange Commission (SEC) that its denial of Bitcoin (BTC) exchange-traded funds (ETFs) is “illogical.”

Replying to a brief filed by the SEC last month, Grayscale says that converting the Grayscale Bitcoin Trust (GBTC) into a spot BTC ETF would greatly benefit traders by unlocking value and increasing investor protections.

“For more than 850,000 investors, converting GBTC to a spot Bitcoin ETF would unlock over $4 billion of value by providing the regulatory relief necessary for the product to simultaneously create and redeem shares, thereby enabling arbitrage to address both premiums and discounts of the shares as compared to net asset value. This conversion would also subject trading in GBTC to heightened regulatory standards and enhance investor protections. The SEC’s reluctance to further bring Bitcoin into the regulatory perimeter through a spot Bitcoin ETF has prevented US investors from gaining the Bitcoin investment exposure they both want and deserve.”

Grayscale first sued the SEC in June 2022. In an October 2022 filing, the firm alleged that the regulatory agency was displaying bias when it rejected the hedge fund’s bid for a Bitcoin ETF in June.

In the lawsuit, Grayscale claims that the SEC’s approval of other BTC-related products, such as its approval of a BTC futures ETF on the Chicago Mercantile Exchange (CME), is inconsistent with its rejection of Bitcoin ETFs.

In the official court filing, Grayscale refers to the SEC’s decision to grant a futures BTC ETF on CME based on its level of security as “illogical” because the same type of security would be needed to operate a BTC ETF.

“The Order in this case is arbitrary to its core. Its central premise – that the Exchange’s surveillance-sharing agreement with the CME provides adequate protection against fraud and manipulation in the Bitcoin futures market but not the spot Bitcoin market – is illogical. Any fraud or manipulation in the spot market would necessarily affect the price of Bitcoin futures, thereby affecting the net asset value of an ETP [exchang-traded product] holding either spot Bitcoin or Bitcoin futures as well as the price investors pay for such an ETP’s shares.”