• Grayscale’s letter to the SEC comes months after the firm filed to convert its Grayscale Bitcoin Trust (GBTC), the investment group’s grantor trust, into an ETF, again, under the ticker BTC
  • Grayscale first filed to convert GBTC in 2017

Attorneys that represent Grayscale Investments have submitted a letter to the US Securities and Exchange Commission (SEC) arguing that failure to approve a spot bitcoin ETF is in violation of federal law. 

The SEC’s decision to approve a futures-based fund and not a spot ETF is “arbitrary and capricious,” and therefore in violation of the Administrative Procedure Act (APA), attorneys from Davis Polk argue in the letter, which was sent Monday and released publically by Grayscale on Tuesday. 

The letter comes months after Grayscale filed to convert its Grayscale Bitcoin Trust (GBTC), the investment group’s grantor trust, into an ETF, again, under the ticker BTC. Grayscale first filed to convert GBTC in 2017. GBTC currently represents roughly 3.4% of outstanding bitcoin, according to the Davis Polk & Wardwell letter. 

Grayscale elected to voluntarily withdraw previous bitcoin ETF filings in 2017 because the SEC cited concerns over fraud and manipulation in the bitcoin market, making both a futures-based and a spot bitcoin ETF unlikely to be granted approval. 

“If you believe that there is fraud or manipulation in the bitcoin market, it makes complete sense to deny both types of ETF filings, they’re both based on the same bitcoin pricing,” Craig Salm, head of legal at Grayscale, told Blockwroks. “Grayscale has had a very strong, active engagement with all of our regulators, we’ve talked about the pricing index, the developments in the bitcoin market, and so on to continue to make the case that we thought the markets were ready, and then fast forward to 2021 and we saw the first futures based filing.” 

The approval of the futures product but not a spot product is inconsistent, Salm said. 

“This year, when we saw the futures-based ETFs start trading, but then yet another spot ETF was denied, we had a situation where now there’s two like situations that are not being treated similarly,” he said. 

The APA provides an opportunity to challenge cases where agencies are not being consistent in rulings, Salm said. 

“The commission has no basis for the position that investing in the derivatives market for an asset is acceptable for investors while investing in the asset itself is not,” the letter states. “But having permitted the listing of multiple Bitcoin futures ETPs in the last several weeks, that is the policy decision the commission would announce were it to deny NYSE Arca’s application to list BTC.”

The APA, enacted in 1946, oversees how administrative agencies of the federal government, such as the SEC, may propose and issue regulations. 

“The APA requires the SEC to treat *like* situations *alike* absent a reasonable basis for different treatment,” Salm said in a statement. “This means the SEC must treat similarly situated investment products similarly.”

The argument that an agency is taking actions that are “arbitrary and capricious” is broad, Gillian Metzger, professor at Columbia Law School, wrote in a briefing for the Poverty & Race Research Action Council. If an agency fails to respond to comments, or if agency actions are not supported by evidence, the arbitrary and capricious argument can be evoked. 

“One factor that matters significantly in determining whether a court is more rigorous in review or weaker is the agency’s credibility and care,” Metzger wrote. “If a court thinks an agency is cutting corners, ignoring relevant factors and evidence, poor analysis pushing an ideological agenda without regard to facts, it can get more searching.” 

It’s not the first time an argument like this has been made in favor of a spot bitcoin fund. Earlier this month, VanEck contended that approval of a futures-based product without spot approval is “inconsistent.” The SEC responded to the comment, which it is required to do, with another denial. 

“The Commission has consistently required that the listing exchange have a comprehensive surveillance-sharing agreement with a regulated market of significant size related to Bitcoin, or demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient,” the SEC’s response said. 

In terms of next steps for Grayscale, the SEC will have to respond to the comment letter. 

“We think the arguments that our attorneys at David Polk made are persuasive and we are looking forward to seeing what the response is,” Salm said.


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  • Blockworks
    Senior Reporter
    Casey Wagner is a New York-based business journalist covering regulation, legislation, digital asset investment firms, market structure, central banks and governments, and CBDCs. Prior to joining Blockworks, she reported on markets at Bloomberg News. She graduated from the University of Virginia with a degree in Media Studies.