The U.S. Securities and Exchange Commission rejected a proposal from Grayscale to list a spot Bitcoin ETF on the NYSE Arca exchange, setting up a potential legal battle with the country's biggest digital asset manager.
The SEC said Grayscale's request for an ETF listing, which it proposed as a conversion of its popular Grayscale Bitcoin Trust GBTC, didn't meet the regulator's standard of being “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”
Grayscale said it would challenge the SEC's decision in court, arguing that its approval of ETFs that hold Bitcoin futures should "logically (make it) comfortable with ETFs that hold that same asset."
“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,” said Michael Sonnenshein, Grayscale’s CEO in a press release.
'Arbitrarily And Capriciously'
“We will continue to leverage the full resources of the firm to advocate for our investors and the equitable regulatory treatment of Bitcoin investment vehicles.”
"The SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously," added Donald B. Verrilli, Jr., Grayscale Senior Legal Strategist and former U.S. Solicitor General. “There is a compelling, common-sense argument here, and we look forward to resolving this matter productively and expeditiously.”
What's at stake: Getting the market watchdog to approve spot exchange-traded funds, or ETFs, based on actual Bitcoin holdings. The SEC so far refuses to do this, even though it approved the first ETFs based on Bitcoin futures in October.
The regulator is concerned about the risks of manipulation and the liquidity and transparency of the Bitcoin market. The SEC had questioned how Grayscale will manage potential price manipulation.
The federal agency in recent months has rejected requests from several funds -- WisdomTree, Fidelity Investments, and SkyBridge Capital. Skybridge is led by Anthony Scaramucci, the short-tenured White House communications director under President Donald Trump.
Advantages of Spot ETFs
Converting their Bitcoin funds into spot ETFs would enable Grayscale and other digital-asset management firms to preserve their edge in cryptocurrency investing as other companies seek to make similar moves.
Pioneers of digital-asset management have long been the few options for investors seeking exposure to bitcoin via the stock market. But that changed when the SEC authorized futures ETF on bitcoin.
In addition, other countries, notably Canada, have already taken the plunge. Ottawa approved its first Bitcoin spot ETFs more than a year ago.
U.S. digital asset management pioneers could thus lose their competitive edge. The surge in Bitcoin prices in 2021 had prompted many institutional investors to want to invest in it. They then turned to the few digital asset managers, creating an imbalance between supply and demand.
But approval of Bitcoin spot ETFs elsewhere is pushing investors to liquidate their positions in these trusts. The trusts also fear being less competitive because new funds would normally charge less.
Furthermore, investors subscribing to new shares issued by a trust must wait six months before they can trade the shares on the secondary market, while ETF investors do not face this type of restriction.
Although anyone can buy and own Bitcoin today, it remains difficult for regular investors with brokerage accounts to manage cryptocurrencies as part of their portfolios.
Grayscale Investments, for example, currently trades only via the OTC market. But if it became an ETF, it would transfer to national exchanges like the New York Stock Exchange and Nasdaq.
Shortly after the conversion, the price gap with Bitcoin – whether premium or discount at the time – would likely disappear. This means that investors who bought the fund at a discount could see gains regardless of fluctuations in bitcoin's price.
