The Securities and Exchange Commission (SEC) has received hundreds of letters in support of the conversion of Grayscale Bitcoin Trust into the first spot Bitcoin exchange traded fund (ETF). The latest ones received just last week, April 21, and they may continue coming in until the SEC takes a decision, likely before July 2022.
In recent months, the SEC rejected several proposals for a spot ETF that would track the price of bitcoin directly, including one by Fidelity. That followed a years-long practice, as the agency has long claimed that the bitcoin market and broader cryptocurrency markets are plagued by price manipulation and fraud, making an ETF a dangerously unsuitable investment for mainstream investors.
The SEC has approved ETFs holding crypto futures because these products trade on platforms that are overseen by U.S. financial regulators, but spot crypto ETFs raise concerns because the digital assets trade on unregulated platforms where surveillance is difficult.
But now, one letter sent to the regulator from Grayscale’s legal counselors last week, on April 18, may increase the pressure on the regulator to turn the world’s largest crypto investment vehicle into a fund that could trade in major exchanges. Grayscale’s fight to become the first spot Bitcoin ETF is seen by many in the industry as the last chance to launch this type of product in the near future. Some rivals have already abandoned plans to open similar funds, and only three other projects are in the queue to obtain approval.
Grayscale’s legal team is supporting its claim for an approval based on a recent decision by the SEC to accept Teucrium future crypto vehicle under rules that would govern spot bitcoin ETFs.
One of the legal arguments brought by Grayscale’s team is that because both spot and futures-based Bitcoin products face exposure to the same underlying Bitcoin market, any fraud or manipulation in the underlying market will affect both products in the same way. Therefore, the existence of these risks cannot be a justification for approving one application and rejecting the other.
“We believe the Teucrium order confirms [that] when it comes to approving exchanged traded products, there is no basis for treating spot Bitcoin products differently from Bitcoin futures products,” said Grayscale’s lawyers in their letter.
The letter continues, citing another provision from the Exchange Act that prohibits exchanges from having rules that “permit unfair discrimination” between issuers. In view of Grayscale, as the listing exchange for Teucrium also seeks to list Bitcoin, an “order disapproving the same exchange’s application to list Bitcoin over concerns with the underlying Bitcoin market would create an unfair discrimination.”
However, it is yet unclear if these arguments will change SEC chief Gary Gensler’s approach to crypto assets. The SEC’s chief has long argued that most tokens are securities and fall under the SEC’s supervision, and crypto platforms must register before offering their products or services. Ongoing litigation on the Ripple case could shed a bit of light on the definition of cryptocurrencies as securities, commodities or currency, but it may not provide an answer for other crypto-related products like a spot Bitcoin ETF — and in any case, the resolution of the case may not come before the SEC adopts a decision on Grayscale.