Grayscale to SEC: Don’t grant ‘prejudicial first-mover advantage’ for bitcoin ETFs

Crypto fund group’s lawyer says surveillance-sharing agreement between a listing exchange and a spot bitcoin trading venue is “not a new idea”


Grayscale Investments wants the US Securities and Exchange Commission to know that the latest wave of prospective spot bitcoin ETF issuers should not have an upper hand over the crypto-focused asset manager. 

Approving certain proposals before others would give the first funds an “unfairly discriminatory and prejudicial first-mover advantage,” a lawyer representing Grayscale wrote in a Thursday letter to the SEC. 

The company sued the US securities regulator last year after the SEC denied its attempt to convert the Grayscale Bitcoin Trust (GBTC) to an ETF.  

Though the SEC has repeatedly blocked spot bitcoin ETFs from coming to market over the last decade, BlackRock’s application to launch such a product last month rejuvenated hopes for many in the industry and spurred other firms to re-file for similarly structured funds. 

Nasdaq, the exchange on which BlackRock’s proposed spot bitcoin ETF would be listed, said in an SEC filing earlier this month that it “reached an agreement on terms with Coinbase” to enter into a surveillance-sharing agreement (SSA). 

The listing exchanges working with other fund groups on bitcoin ETF proposals, such as Cboe, added similar language to their own applications.

Read more: How ‘surveillance-sharing’ is designed to deter bitcoin ETF manipulation 

The possibility of a surveillance-sharing agreement between a listing exchange and a spot bitcoin trading venue is “not a new idea,” according to a Thursday letter to the SEC by Joseph Hall, partner at Davis Polk — a law firm representing Grayscale. 

Grayscale discussed the viability of such a surveillance-sharing agreement with SEC staff in 2019, he added.

“The Commission is already in a position to approve spot bitcoin ETPs based on the standard it has previously articulated, though a surveillance-sharing agreement with a spot bitcoin trading venue in and of itself would neither satisfy nor be necessary under that standard,” Hall wrote.

The SEC is able to approve spot bitcoin funds now because it allowed bitcoin futures ETFs to launch, Grayscale Chief Legal Officer Craig Salm said in a blog post published after the letter. Bitcoin’s spot and futures markets “are inextricably linked,” he added.

“Although we do not believe the introduction of an SSA with a spot bitcoin market is or should be the ‘silver bullet’ to getting spot bitcoin ETFs approved in the US…Grayscale continues to support any effort that enables investors to access the crypto ecosystem, and we applaud all progress that brings more oversight to centralized crypto markets,” Salm wrote.

Simultaneous approval for all planned bitcoin ETFs? 

Grayscale supports the approval of all proposed spot bitcoin ETFs at the same time, Hall said, noting that only allowing the latest filers to launch “would reflect a positive but sudden and significant change in the commission’s application of the relevant statutory standard.”

The letter notes that the first products to market would gain an “unfairly discriminatory and prejudicial first-mover advantage” — alluding to the history of the first ETFs to market for a particular investment theme often seeing the bulk of investor assets.

While first-mover advantage has proven true across a range of ETF categories over the years, the younger crypto-related fund space has largely confirmed that trend. 

ProShares’ Bitcoin Strategy ETF (BITO), the first ETF in the US to hold bitcoin futures contracts, hit $1 billion in assets under management just days after launching. The second such fund to launch — by fund group Valkyrie just a few days later — has just $30 million in assets. 

Grayscale is not the only one rooting for the SEC to approve all spot bitcoin ETFs at the same time. 

Matthew Sigel, VanEck’s head of digital assets research, urged the SEC to “stop picking winners” in a June Twitter thread. Bloomberg Intelligence analyst James Seyffart said during an ETF Prime podcast earlier this month that letting BlackRock launch first, for example, would be “a really bad look.”

Industry watchers have noted that even if Grayscale wins its case against the SEC, that wouldn’t necessarily mean it would immediately be able to convert GBTC to an ETF. 

Dave Nadig, a financial futurist at data firm VettaFi, previously told Blockworks that such a ruling could spur the SEC to deny GBTC’s conversion, and other spot bitcoin ETF applications, via different reasoning. 

If new SEC guidance spurs more refiling efforts, the GBTC conversion could “lag new launches,” Nadig added at the time.

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