In a new brief challenging ETF rejection, Grayscale asserts the SEC hurt investors

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Last Updated on October 12, 2022 by Bitfinsider

Grayscale Investments has filed its opening brief in a lawsuit challenging the SEC’s rejection of its application for a spot bitcoin exchange-traded fund.

The company’s legal argument rests on what it perceives to be an inconsistent enforcement of the law as a result of authorities’ approval of bitcoin futures related to spot market prices.

Craig Salm, the chief legal officer of Grayscale, stated on Tuesday that if the SEC is comfortable with futures contracts, which are priced by exchanges allowing spot market trading, it should also be comfortable with the underlying asset.

Salm claimed that allowing futures without approving a spot ETF is a distinction without a difference in the context of bitcoin because “CME bitcoin futures are priced under the spot bitcoin market.”

In its initial brief submitted in the lawsuit, the business built upon its claim.

The brief stated: “The Commission has violated the [Administrative Procedure Act’s] most basic requirements by failing to justify its vastly different treatment of bitcoin futures ETPs and spot bitcoin ETP.”

Late in June, the regulator denied Grayscale’s request to convert its flagship fund, GBTC, into an ETF. The same day the judgement was rendered, the company indicated it would file an appeal, making good on earlier threats to take legal action.

This brief asserts that the SEC’s reluctance to allow GBTC’s conversion affects the trust’s 850,000 existing shareholders.

The filing state: “Given that the Commission did not approve the Trust to trade as an ETP on the Exchange, the value of its shares cannot closely track the value of the Trust’s underlying bitcoin assets—depriving Trust shareholders of billions of dollars in value.”

When the SEC approved futures-based bitcoin ETFs beginning in October of last year, many in the sector hoped the SEC would reverse its stance on spot bitcoin ETFs. At the time, some believed it was an indication that the SEC was moving toward a physically-held product. Hopes were immediately shattered, however, as the SEC proceeded to reject applications for a spot bitcoin ETF, most recently rejecting WisdomTree’s plan on Tuesday.

In a letter addressed to the SEC in November of last year, when the regulator began issuing a wave of new rejections, Grayscale seeded the seeds of what would become its legal case. Grayscale asserted at the time that the SEC’s readiness to allow futures products but not spot could violate the Administrative Procedures Act.

The SEC’s response is due on November 9.


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