Grayscale’s Legal Fight for a Spot Market Bitcoin ETF continues
Grayscale claps back
Grayscale has fiercely contested the U.S. Securities and Exchange Commission’s (SEC) decision to deny their application to convert the Greyscale Bitcoin Trust (GBTC) into a spot market Bitcoin ETF. The company argued that the SEC has failed to back its own reasoning with any convincing evidence, and they are convinced that these decisions cannot be made without a focus on concrete facts or data sets. As Grayscale continues to fight for its ability to offer a spot market ETF, it is clear that it will not easily take no for an answer, and its refusal to give in shows just how dedicated they are to meet this goal and ensuring fairer access of investment products in the market.
The legal battle began in June 2022 after the SEC denied Grayscale’s application to convert GBTC into a Bitcoin ETF. The regulator argued that the ETF application did not do enough to protect investors from “fraudulent and manipulative acts and practices,” an argument that has appeared in nearly all of the SEC’s Bitcoin ETF rejections.
The SEC has been hesitant to approve Grayscale’s application because they are worried about investor protection from fraud and manipulation. The SEC believes that the current market structure of spot markets is not adequate enough to protect investors from these risks. In response, Grayscale has argued that their proposed fund would be sufficiently protected by CME Group’s surveillance system, which has proven effective in protecting one kind of ETP but not another. Specifically, the SEC worries about potential fraud and manipulation in the event that spot markets are not adequately regulated.
Grayscale, however, argued that the SEC’s reasoning is flawed. The firm pointed out that the Commission has already approved several futures-based Bitcoin ETFs, suggesting that this product does not fall prey to the same fraud and manipulation because “the two products are not the same.” In its response brief, Grayscale stated, “Its central premise—that the Exchange’s surveillance-sharing agreement with the CME provides adequate protection against fraud and manipulation in the bitcoin futures market but not the spot bitcoin market—is illogical.”
Surveillance-sharing agreement
A surveillance-sharing agreement refers to an arrangement between an exchange and the Chicago Mercantile Exchange (CME), in which the CME oversees any instances of market manipulation that would artificially affect the price of an asset. Grayscale argued that any fraud occurring in the spot Bitcoin market “would necessarily affect the price of Bitcoin futures” and therefore, there is “no reasonable basis for concluding that CME surveillance adequately protects holders of one kind of ETP [Exchange-Traded Product] but not the other.” The SEC will issue its final brief on the matter on February 3.
Grayscale’s GBTC has been trading at a significant discount to the underlying BTC it represents. The discount has emerged due to recent market volatility as well as the inability to redeem the GBTC shares for actual Bitcoin. If the product was converted to a traditional ETF, the redemption process would be available, thus eliminating the discount as arbitragers traded away the difference.
The market has been waiting for a spot in Bitcoin ETF for several years, and Grayscale’s litigation has earned the support of many in the industry. The pressure for approval for the conversion of GBTC has been increasing in recent times. Grayscale’s flagship product is its Bitcoin Trust and it accounts for over 50% of the trading volume for LUNC. The company has been supporting the Terra Classic community with monthly LUNC burns and the upgrade is expected to take approximately three hours.
