Shades of Gray Push Back Against SEC’s Spot Bitcoin ETF Denial

The rise of the exchange-traded fund (ETF) has opened up creative investments, leading to an increase in thematic funds and also opening the door to cryptocurrencies. However, a major roadblock has been the Securities Exchange Commission (SEC), which is facing a lawsuit from Grayscale Investments after denying a conversion of the Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF.

Grayscale’s attempt at a spot Bitcoin ETF is not the SEC’s last block. Recently, WisdomTree also attempted to bring a spot Bitcoin ETF to the US stock market, but the SEC also denied approval, citing a lack of investor protections — a common refrain for SEC denials.

Grayscale and other ETF providers’ goals are clear: getting a spot Bitcoin ETF approved could help bring more institutional money into the digital asset space, especially after last year’s bull run. Even with 2022’s bear market in cryptocurrencies, there is still great interest in combining this new asset class with the traditional financial market.

The move for Grayscale’s GBTC to an ETF will make it a more dynamic investment vehicle, as well as give it more exposure via a public US exchange. However, the SEC’s spate of recent rejections prevents this from being realized.

In the eyes of the SEC, it may be a case of the same story different filing application. This is where Grayscale takes issue with the recent denial, noting that the spot Bitcoin product should not be included as part of a blanket denial.

“This strong arbitrariness cannot be justified or reconciled with the commission’s mandate to treat similar cases equally. Rather, it can only be understood as a substantive judgment about the merits of a spot Bitcoin investment — the kind of substantive judgment that is beyond the Commission’s authority,” Grayscale noted in a legal brief.

Given this, the waiting game seems to continue for a spot Bitcoin ETF. It worked after Proshares’ introduction of ProShares Bitcoin ETF (BITO) last year may have opened the floodgates, but the SEC has not relented.

A glimmer of hope with new ETF

Nevertheless, all is not lost for a spot Bitcoin ETF whether or not it happens before the end of 2022. The introduction of the Hashdex Bitcoin Futures ETF (DEFI) could pave the way for a spot Bitcoin ETF in 2023, building off the momentum of DEFI’s introduction to the American market.

However, of course, the hurdle of SEC approval remains. If crypto market regulation falls under the SEC’s watchful eye, it could just grease the wheels for not only a spot Bitcoin ETF, but other cryptocurrency ETF products to enter the market.

“The launch of this Teucrium product only strengthens the case for a spot Bitcoin ETF since it uses the exact same fund structure,” said Nate Geraci, president of The ETF Store, an advisory firm. “That said, a ‘strengthened case’ doesn’t mean the SEC will budge from its hard line. I’m still in the camp that a spot product simply won’t be approved until the SEC has regulatory oversight of crypto exchanges.”

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