Lawyers for the investment firm call out inconsistent treatment of Bitcoin trusts and futures in the protracted debate.
Decrypt AI, Edited by Ryan Ozawa4 min read
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Lawyers representing crypto asset manager Grayscale Investments urged the Securities and Exchange Commission (SEC) to "expeditiously" approve a spot Bitcoin exchange-traded fund (ETF) in a letter sent to the federal agency Tuesday, continuing its victory march following Grayscale's recent court win against the regulator.
The letter from law firms Davis Polk and Munger Tolles & Olson comes after a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled last week that the SEC was wrong to reject Grayscale's proposed bitcoin ETF without adequately explaining its reasoning. The ruling requires the SEC to review Grayscale's application again, although the agency still has time to appeal.
"We believe the commission should conclude that there are no grounds for treating the trust differently from ETPs [exchange-traded products] that invest in Bitcoin futures contracts," the lawyers wrote, citing Bitcoin futures ETFs that the SEC has already approved.
Grayscale has argued that its proposed spot Bitcoin ETF should be approved because it would rely on the same market surveillance arrangement with the Chicago Mercantile Exchange (CME) that the SEC has deemed sufficient for Bitcoin futures ETFs. The appeals court agreed, ruling that the SEC never explained why the two arrangements were materially different.
"If any other reason could be offered in attempting to differentiate spot Bitcoin ETPs from Bitcoin futures ETPs…we are confident that it would have surfaced by now," the lawyers stated.
A spot Bitcoin ETF would give mainstream investors exposure to Bitcoin without having to own the cryptocurrency directly. The SEC has denied all spot bitcoin ETFs applications, often citing potential market manipulation concerns.
Grayscale's Bitcoin Trust is currently the largest Bitcoin fund, with over $16 billion in assets. But its shares trade at a discount to the fund's Bitcoin holdings, which the lawyers stated causes "unjustified harm" to investors.
They argued this harm could be avoided if the trust converted to an ETF structure, writing that the discount briefly tightened by more than 600 basis points the day of the court's ruling "in anticipation of eventual Rule 19b-4 approval."
The letter also argued that U.S. investors are being forced into "less efficient and more complicated product structures" than spot bitcoin ETFs, pointing to the recent inflows into Bitcoin futures ETF following the court decision.
In addition, it noted that Grayscale faces new competition, as the SEC received listing applications in recent weeks for several other proposed spot Bitcoin ETFs.
Grayscale has maintained in comment letters that the SEC cannot impose additional requirements on spot Bitcoin ETFs beyond what it has deemed sufficient for Bitcoin futures ETFs. The court ruling stated that the SEC's surveillance-sharing arrangement with CME "should have the same likelihood of detecting fraudulent or manipulative conduct in the market for Bitcoin and Bitcoin futures."
Overall, the lawyers stated that the SEC's years-long review of Grayscale's application has now stretched well past the deadlines outlined in securities law. They questioned whether the SEC's subsequent disapproval, later vacated by the court, fulfilled its legal obligations for timely action.
"We believe the trust's nearly one million investors deserve this fair playing field as quickly as possible," the lawyers concluded, while reaffirming Grayscale's readiness to operate its Bitcoin Trust as an ETF.
The SEC and Grayscale have 45 days to appeal the court's decision. If appealed, the case could go to the Supreme Court or be reheard by the entire D.C. Circuit Court.
