Greyscale’s Bitcoin Case Gets Support From Capricious SEC View

The US Securities and Exchange Commission’s refusal to approve exchange-traded funds (ETFs) based on spot bitcoin trading is based on a distinction without a difference, according to one of five briefs filed Wednesday in support of asset manager Grayscale Investments’ lawsuit against the agency.

The friend of the court, signed by former US regulators, points out that the SEC is fine with ETFs based on a futures index that have a near-perfect correlation with a gauge based on spot prices. The SEC has based its opposition to spot-based ETFs on their vulnerability to fraud and manipulation, but the evidence indicates that they are no more vulnerable than futures.

Grayscale, which is getting support from crypto and traditional finance in its legal battle, sued the SEC in June after the regulator rejected Grayscale’s attempt to convert its $12 billion bitcoin trust (GBTC) into a spot bitcoin ETF. Before the lawsuit, more than 11,000 letters of support for Grayscale were received by the agency

The five amicus curiae briefs were filed with the Court of Appeals for the District of Columbia on Wednesday. Proponents of grayscale include crypto exchange Coinbase; industry advocates Blockchain Association and Coin Center; Chamber of Digital Commerce; NYSE Arca, the stock exchange that had sought permission to list the Grayscale trust’s shares; and a group of academics and former regulators.

The amici claims that the commission’s decision to approve applications for bitcoin futures ETFs, but not spot funds, such as Grayscale, was arbitrary and lacked “adequate justification.” To demonstrate the point, a comparison was made between an index underlying futures-based ETFs that the SEC allows to trade, CME CF BitcoinBTC
Benchmark rate, and the index underlying the Grayscale trust, the CoinDesk Bitcoin Price Index. With a correlation of 0.98, the two appear to be almost perfect substitutes, said the letter, which was signed by former SEC and CFTC officials as well as former acting US Comptroller of the Currency Brian Brooks, among others.

The Chamber of Commerce has accused the SEC of “engaging in private policymaking” and argued that its “actions, both in issuing a decision without adequate explanation and in avoiding regulation on this issue, ultimately harm investors and businesses.”

In addition, several parties have argued that the Commission’s rejection ultimately harms US competitiveness. “Denying investors the benefits of a spot” exchange-traded product, which would have allowed investors to gain exposure to bitcoin without buying it directly, stifles unnecessary innovation, causing the US to fall behind well-regulated markets around the world that already have adopted such products”, says Coinbase’s card.

“You see a diversity of high-quality opinions from different parties,” says Craig Salm, general counsel at Grayscale. “It shows collectively that this is an important political topic that the investment community cares about.”