Grayscale Accuses SEC of Unfair Treatment of Bitcoin ETPs as Legal Battle Kicks Off

Grayscale Investments, the largest asset management firm in the crypto space, has fired back at the Securities and Exchange Commission (SEC) for refusing its proposal to launch a cryptocurrency exchange-traded fund (ETF).

Not Taking Rejection Lightly

Earlier this week, Grayscale filed a legal brief with the U.S. Court of Appeals in the District of Columbia Circuit, criticizing the SEC’s refusal to allow it to convert its Grayscale Bitcoin Trust into a spot Bitcoin ETF. The company argued that the SEC’s action was “arbitrary, capricious and discriminatory,” adding that the regulator had hurt innovation in the industry by refusing multiple ETF applications.

The legal action originates from Grayscale’s decision to convert its Bitcoin Trust, which according to data, currently holds $12 billion in assets under management, into a spot Bitcoin ETF. At the time, company communications director Jennifer Rosenthal explained that they would proceed with offering the GTBC as an ETF once the SEC “formally expressed their requisite comfort with the underlying Bitcoin market.”

While Grayscale went ahead with the application, the company was soon met with the same fate as several others that had applied for spot Bitcoin ETFs. The SEC delayed its decision on the ETF application multiple times, prompting many to believe it would decline the asset manager’s aspirations once again. True to form, the SEC did just that.

In the wake of the agency’s decision, Grayscale’s top brass immediately confirmed that they would challenge the agency. On June 30, Grayscale CEO Michael Sonnenshein confirmed that they had filed a suit against the agency, with senior legal strategist – and former U.S. solicitor general – Donald B. Verrilli Jr. taking charge of the petition.

Unfair Treatment for Bitcoin ETPs

In its recent filing, Grayscale accused the SEC of treating Bitcoin exchange-traded products (ETPs) with “special harshness.” The company added that since the SEC had not taken sole responsibility for regulating the U.S crypto space, it continues to act outside of its jurisdiction by knocking back ETP applications.

Attorneys for the asset manager pointed to the fact that the SEC already approved ETFs based on Bitcoin futures; the agency did so a little over a year ago, marking a landmark win for the market. However, the agency has so far denied all applications for a spot Bitcoin ETF, even though these ETFs generate the price metrics based on the same indexes used by the futures ETFs that have been approved.

Therefore, there is no basis for the SEC to argue that spot Bitcoin ETFs are more dangerous to everyday investors than futures ETFs. And by failing to justify its different treatment for spot Bitcoin ETFs and Bitcoin futures ETFs, the agency has now violated the Administrative Procedures Act (APA) – an Act that Verrelli accused the agency of violating in his original filing.

Gonna retweet this because Grayscale has already filed their APA lawsuit for the $GBTC denial. Here is our *estimated* timeline of events courtesy of @NYCStein. But things are moving fast. https://t.co/ql8a43W5vs

— James Seyffart (@JSeyff) June 30, 2022

Besides all of this, Grayscale has also argued that the SEC’s “significant-market test,” which assesses the potential for an ETP to be fraudulent and manipulative, is flawed. The asset management firm argued that the agency had deliberately “set the bar so high” that it couldn’t be satisfied.

The SEC is expected to submit a responding brief to Grayscale before November 9. Afterward, the asset manager is expected to submit a replying brief on November 30 before both parties submit their final briefs on December 21.

However, in a Q&A session about the case, Grayscale legal chief Craig Salm pointed out that the lawsuit could take two years.

Since I’ve started this job, we’ve consistently been asked: When will @Grayscale file for a #Bitcoin ETF?

— Jennifer Rosenthal (@jenn_rosenthal) October 18, 2021

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