The Securities and Exchange Commission recently killed the best chance investors have had so far to see the approval of a spot Bitcoin ETF, as it rejected applications from Grayscale Investments and Bitwise Asset Management.
The regulators said the ETF sponsors had not proven that crypto exchanges had a “comprehensive monitoring sharing agreement with a regulated market of significant size” to prevent fraud and tampering.
Within minutes of the ruling being released, Grayscale boss Michael Sonnenshein tweeted“We have filed a lawsuit against the SEC.”
Although it is not typical for a company to sue its regulator, it is also not unheard of. Meanwhile, like the Holy Grail, the spot Bitcoin ETF seems as elusive as ever.
“It is clear now that the SEC will not approve any spot Bitcoin ETFs until they have regulatory oversight of crypto exchanges. That is the main decision from the ruling,” said Nate Geraci, president of The ETF Store, an RIA in Overland Park, Kan. $ 200 million. He said that comments from SEC leader Gary Gensler over the past year show that he believes the crypto market is the wild west with a significant lack of investor protection.
Since 2016, the SEC has rejected 16 spot Bitcoin ETF applications. WisdomTree, Ark 21Shares and Van Eck are currently pending before the Commission.
Grayscale wanted to convert its Grayscale Bitcoin Trust (GBTC), the first and largest Bitcoin investment car in the United States, into an ETF. Launched in 2013, it currently has $ 12.3 billion in assets and 3.3% of all Bitcoin in circulation, according to the company.
In an ETF, the stock creation and redemption process allows traders to arbitrate the difference between the net asset value of the underlying holdings and the stock price, and keep the price close to NAV; The fund is currently trading at a 31% discount on its assets. Current shareholders would have realized this gain if the fund had converted to an ETF.
But the basis for Grayscale’s lawsuit is that the SEC has previously approved ETFs that hold Bitcoin futures.
“We believe that the approval of Bitcoin futures ETFs, but not Bitcoin spot ETFs, is ‘arbitrary and capricious’ and ‘unfair discrimination,'” contrary to the Administrative Procedure Act and the Securities Exchange Act of 1934, a spokeswoman for Grayscale said. WealthManagement.com.
The ’34 Act regulates the possibility for Bitcoin ETFs to be listed on national stock exchanges. APA requires regulators to treat similar situations in the same way, without reasonable justification for unequal treatment.
“Given that both types of ETFs are priced based on the same underlying Bitcoin market, we believe the Court of Appeal will understand and appreciate these simple arguments,” the spokeswoman said.
“This is not a frivolous lawsuit,” said James Seyffart, ETF analyst at Bloomberg Intelligence. “Grayscale is an underdog, but it would not be a great situation if they were to win. Bloomberg thinks they have a 40% chance.”
Legal experts working for Grayscale, such as former U.S. Attorney Donald B. Verrilli Jr. shows that the case has legs. Verrilli filed the petition with the U.S. Court of Appeals for the DC Circuit.
“There are a number of different roads here,” Seyffart said. “One is that Grayscale wins the lawsuit and is able to convert GBTC to an ETF before spot Bitcoin ETFs are approved under the current process.” The case will probably take anywhere from nine months to two years.
“Grayscale’s timeline is shortened because we are circumventing one level of the judicial system and going directly to the DC Circuit Court of Appeals due to the fact that the petition concerns a federal agency,” the spokeswoman said.
Seyffart said that if crypto markets are federally regulated, it is possible that another place for the Bitcoin ETF could be approved before this lawsuit is settled because things are constantly changing at the SEC and the Commodity Futures Trading Commission. He added that congressional actions are possible with a crypto bill from US senators Kirsten Gillibrand (DN.Y.) and Cynthia Lummis (R-Wyo.).
Proponents say a spot Bitcoin ETF is important because investors want exposure and it is easier for their advisors to put the cryptocurrency into their current workflow in an ETF structure.
Currently all available options are sub-pairs. GBTC trades at a huge discount and requires a management fee of 2%, double the expense ratio of futures Bitcoin ETFs. If investors buy Bitcoin on a cryptocurrency exchange, they pay high fees including a commission of 1.5%. It is then kept in a crypto wallet where they risk losing the password. They can buy a futures Bitcoin ETF, which may not track the spot price and have the cost of rolling over each month, or crypto-ETFs, which have shares in listed companies next to the crypto universe.
They can also invest in separately managed accounts run by companies such as Eaglebrook Advisors.
Bitwise, which manages $ 1 billion in cryptocurrencies and recently launched its own SMA, plans to respond to the ETF rejection with research to address the SEC’s problems.
“In the meantime, the industry is not going to stop trying to launch a spot Bitcoin ETF,” said Matt Hougan, Bitwise’s chief investment officer. “And it’s not going to stop other ways of accessing crypto markets. I suspect this will increase interest in SMA solutions, which fill part of the market need that an ETF would fill. If you squeeze a balloon on one side “It will bulge on the other, right?”
