Grayscale Lawsuit: SEC Treats Spot Bitcoin ETPs With ‘Special Harshness’

Grayscale stated that the SEC’s application of its “significant market test” is deeply flawed and does not protect investors against potential fraud and manipulation in the underlying BTC markets.

The SEC is notorious for turning down dozens of spot Bitcoin ETF applications over the past several years from major players including WisdomTree and Ark21Shares. Grayscale, for one, has taken the legal route to resolve the matter. It has argued that the regulator acted outside its authority by not accepting other means of preventing fraud risk.

Grayscale’s Brief

The world’s largest digital asset manager, Grayscale, announced filing its opening brief against the US  Securities Exchange Commission (SEC) to challenge its decision to deny the application to convert the Grayscale Bitcoin Trust (GBTC) to a spot Bitcoin ETF.

The brief reads,

“That stark arbitrariness cannot be justified or reconciled with the Commission’s mandate to treat like cases alike. Rather, it can be only understood as a substantive judgment on the merits of a spot Bitcoin investment – the kind of substantive judgment that is outside the Commission’s authority.”

In its court filing, part of the lawsuit filed in June, the asset manager said the Commission has set the bar so high for spot Bitcoin exchange-traded funds “that the promise of an alternative route to rule-change approval is illusory.”

Playing Favoritism

The SEC has been rejecting spot Bitcoin ETF applications for years, echoing the same market manipulation concerns but has allowed futures-based Bitcoin ETFs in the country.

Grayscale believes the SEC’s assessment for the same is “arbitrary, capricious, and discriminatory.” It further said the Commission treats Bitcoin futures exchange-traded products differently than the spot ones but has failed to provide an adequate justification for the same.

Craig Salm, Grayscale’s Chief Legal Office, slammed the SEC by pointing out that the Administrative Procedure Act and Exchange Act require rules and regulations to be applied without “favoritism” for one type of product or another.

Grayscale sued the SEC on June 29th and filed for the US Court of Appeals for the District of Columbia Circuit to review the agency’s decision for denying the conversion of GBTC into an ETF for listing on Intercontinental Exchange Inc’s NYSE Arca exchange.

The lawyers of the asset manager argue that the SEC offered no “coherent explanation” for approving the one and rejecting the other when both Bitcoin futures and spot Bitcoin generate their price based on overlapping indices and therefore are subject to the same risks.