Shades of Gray Says US SEC Set Bar Too High for Bitcoin Funds

Oct 11 (Reuters) – Grayscale Investments said in a court filing on Tuesday that the U.S. Securities and Exchange Commission set the bar too high for spot bitcoin exchange-traded funds, which have so far not been approved for listing on U.S. exchanges.

Grayscale sued the regulator in June, after the SEC denied its bid to convert Grayscale Bitcoin Trust ( GBTC.PK ), the world’s largest bitcoin fund, into an ETF for listing on Intercontinental Exchange Inc’s ( ICE.N ) NYSE Arca exchange.

The regulator had said the proposal did not meet standards designed to prevent fraudulent practices and protect investors.

The SEC has rejected over a dozen spot bitcoin ETF applications, and approved several bitcoin futures-based ETFs. The rejections have focused on the applicants’ lack of monitoring sharing agreements with regulated markets linked to the spot funds’ underlying assets. Such agreements involve the sharing of trading data and other information to allow the exchange to detect manipulation.

Grayscale argued in the lawsuit that the SEC had not applied its standards uniformly to detect bitcoin ETFs and bitcoin futures-based ETFs, even though both types of funds are both fundamentally linked to the price of bitcoin.

“There is only one reasonable conclusion to draw: The Commission treats spot bitcoin ETPs with particular harshness based on its opinion of bitcoin’s merits compared to other types of investments,” the company said in the filing.

There is no spot bit market that the SEC considers to be regulated, Grayscale said. But NYSE Arca had entered into a monitoring-sharing agreement with the Chicago Mercantile Exchange, where bitcoin futures are traded, it said.

Since the SEC deemed other agreements with CME sufficient to prevent fraud in bitcoin futures-based ETFs, the same should apply to bitcoin spot ETFs since both types of funds depend on the price of bitcoin, Grayscale said.

Grayscale also argued that the SEC acted beyond its authority by not accepting other ways to reduce fraud risk.

Reporting by Jody Godoy in New York; Editing by David Gregorio

Our standards: Thomson Reuters Trust Principles.