Grayscale, a bitcoin investment trust, has failed in its attempt to convert its Bitcoin Trust, known as GBTC, into an exchange-traded fund (ETF). Grayscale filed its application in October 2021 and, following a slew of delays, was knocked back by the US Securities and Exchange Commission (SEC).
In its rejection, the SEC outlined that failure by the investment manager to respond to questions about market manipulation concerns was the reason for the application being rejected.
Grayscale then filed a petition in the US Court of Appeals, District of Colombia Circuit challenging the decision. The litigation is being led by Donald B. Verrilli Jr. who stated that the SEC is:
failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934.
The SEC has reportedly told spot ETP sponsors they must demonstrate that a significant amount of bitcoin trading occurs on a regulated market or that the underlying market:
inherently possesses a unique resistance to manipulation beyond the protections that are utilised by traditional commodity or securities markets.
We anticipate that Grayscale will argue that such a standard imposes a higher burden on sponsors of a spot Bitcoin ETF than ETFs based on securities or other investment products.
The SEC's position on Grayscale's proposed spot bitcoin ETF stands in contrast to its previous decisions to approve a synthetic bitcoin ETF and a futures based bitcoin ETF. Elsewhere, regulators in Canada (3iQ), Brazil (QR Capital) and Australia (21Shares and Cosmos) have approved spot bitcoin ETFs. A number of further applications are awaiting approval from the Australian Securities and Investments Commission (ASIC).
While many had hoped the SEC would open the door to greater institutional investment in cryptocurrency markets, it appears that the battle over the spot bitcoin ETF will now continue in the Courts.