A U.S. court is probing the country’s Securities and Exchange Commission (SEC) for rejecting Grayscale Investments’ application to convert its Grayscale Bitcoin Trust (GBTC) into an Exchange Traded Fund (ETF). The judges argued that since the SEC once approved its bitcoin futures-based ETF, the same should apply to Grayscale’s spot funds since they both rely on bitcoin price movements.
Grayscale argued the SEC’s rejection of its application in court on Tuesday after it sued the U.S. regulator for rejecting its flagship conversion in June. The SEC rejected the proposal, saying it fell short of anti-fraud and investor protection laws.
Grayscale Investments is a subsidiary of Digital Currency Group (DCG), a venture capital firm based in the United States. Grayscale is a publicly traded bitcoin fund that trades the over-the-counter (OTCQX) market. In 2017, Grayscale made a similar application to change to an ETF in 2017 but withdrew voluntarily following the SEC’s negative remarks.
Court Seeks Clarification on the SEC’s Rejection
Chief Judge Sri Srinivasan and Judges Neomi Rao and Harry Edwards of the District of Columbia Circuit Court of Appeals in Washington, D.C., queried SEC Senior Counsel Emily Parise in today’s court sitting. The judges sought enlightenment on the SEC’s parameters used to evaluate the Grayscale ETF application before rejecting it.
“It seems like it’s fine for an agency to say okay, we need some more information, but it seems there’s quite a bit of information here on how these markets work together, and the SEC has not offered any explanation… that the petitioners here are wrong,” Judge Rao said.
While rejecting the filing, the SEC stated that the ETF was more susceptible to manipulation than the spot bitcoin market. It noted that the data collected by the regulator while approving its bitcoin futures contract didn’t show if the spot market was prone to fraud and manipulation.
“The evidence is just mixed at this point. It’s bi-directional sometimes,” Emily True Parise, senior litigation counsel for the SEC, said. She also noted that the bitcoin futures have only been trading for six years.
ETFs are More Investor Protective-Grayscale
Grayscale countered the notion raised by the SEC, noting that ETFs are more investor protective than bitcoin futures. Donald Verrilli, the legal representative for Grayscale, noted the disintegrated nature of ETFs. This contrasts with the bitcoin futures market, which relies solely on the Chicago Mercantile Exchange (CME).
The court did not pronounce any ruling on the case, but some companies will keep tabs on the matter. Firms like VanEck and SkyBridge have previously seen the SEC reject their bids to enter the ETF market.
