Grayscale Writes SEC, Says it is Breaking the law

Early this year, one of the major struggles the crypto community had to deal with was the reluctance of the United States Securities and Exchange Commission (SEC) to approve a crypto-related exchange-traded fund (ETF).

With the SEC now finally approving a number of Bitcoin futures ETFs like that of ProShares and VanEck, the focus has shifted as the community now wants the financial regulator to approve one of the numerous Bitcoin spot ETF applications before it.

The most recent effort from the community on this front is a letter written by Grayscale, the leading digital asset management company, where it stated that the Gary Gensler-led commission could be in violation of the Administrative Procedure Act (APA).

Grayscale Says the SEC Might be Breaking the law 

In the letter issued through its attorney early this week, the asset manager claimed that the SEC’s preference for a Bitcoin futures ETF over that of a BTC spot ETF is arbitrary and discriminatory in nature.

The lawyers argued that the SEC has no basis for its current position where it is maintaining that “investing in the derivatives market for an asset is acceptable for investors while investing in the asset itself is not.”

Last night our attorneys at Davis Polk sent a letter to the SEC arguing that approval of #Bitcoin futures-based ETFs, but not #Bitcoin spot-based ETFs, like $GBTC, is “arbitrary and capricious,” and therefore in violation of the Administrative Procedure Act (APA).

— Craig Salm (@CraigSalm) November 30, 2021

According to a series of tweets published by Craig Salm, a top official at Grayscale, the firm might not have had a position against the SEC if it had not approved a Bitcoin futures ETF, however, since it has granted an approval for an ETF, then the law “requires the SEC to treat like situations alike absent a reasonable basis for different treatment. This means the SEC must treat similarly situated investment products similarly.”

What the law says

Per Ishan Pandey, an associate at KARM Legal Consultants, in his interpretation of the subject matter, “the courts may compel SEC actions under Section 706 (1) of APA as unlawfully withheld or unreasonably delayed. Under this section, the court can find the actions of the SEC unlawful and set aside SEC actions, findings and conclusions.”

He continued that the commission might find it difficult to build its case against Grayscale because its “current reasons for rejecting such applications are based on subjective opinions and not based on the standing of laws.”

1/Yesterday we submitted a letter strongly urging the SEC to approve NYSE Arca’s application to convert Grayscale's BTC Trust to an ETF. https://t.co/Udw3EK36nw

— Blockchain Association (@BlockchainAssn) November 30, 2021

This position is also shared by popular crypto lawyer Jake Chervinsky who in a tweet said that “now that bitcoin futures ETFs are live, the SEC has no valid justification for denying @Grayscale’s spot ETF application. The Administrative Procedures Act demands approval. It’s time.”

SEC’s Position on Bitcoin ETFs Approval

Before the ascension of Gary Gensler as the chairman of the SEC, the commission had always rejected all crypto-related ETFs applications before it.

However, since he took over office, the chairman has hinted that the commission could approve a futures-backed ETF rather than the one which would grant direct exposure to the digital asset.

According to the SEC, its reluctance to approve a BTC spot ETF is tied to its effort to better protect investors from the volatile nature of the flagship digital asset.

It should be noted that the commission has approved a number of Bitcoin futures ETFs like that of ProShares, VanEck and Valkyrie. As recent as this week, the regulator still refused to approve a spot application from WisdomTree.