Grayscale Sues SEC Over Rejection of Proposed Spot Bitcoin ETF

Fund manager describes SEC actions as “arbitrary and capricious”


Blockworks exclusive art by Axel Rangel


key takeaways

  • Grayscale’s proposed spot bitcoin ETF fails to meet the required standard to prevent fraud and manipulation, the SEC said
  • The asset manager has asked a US Court of Appeals to review the SEC’s decision

One of the world’s largest digital asset managers sued the US Securities and Exchange Commission (SEC) shortly after the agency rejected its application to convert its flagship bitcoin trust into an exchange-traded fund (ETF) on Wednesday.

“We are deeply disappointed by and do not agree with its decision,” Grayscale Investments said in a statement posted on its website. In the statement, Grayscale also said the SEC’s actions were “arbitrary and capricious.”

The SEC also rejected Bitwise’s application for a spot bitcoin ETF on the same day.

In a ruling on Wednesday, the SEC denied Grayscale’s proposal to list a spot bitcoin ETF on the NYSE Arca exchange. The proposed ETF failed to meet the standard designed to prevent fraudulent and manipulative practices and to protect investors and public interest, the regulator said.

Challenging the SEC’s decision, Grayscale has asked the US Court of Appeals for the District of Columbia Circuit to review the SEC’s decision, according to a petition for review on Wednesday.

The SEC’s identification of possible sources of manipulation in the spot market includes people with a dominant position in bitcoin attempting to manipulate its price, hacks on trading platforms and Tether’s “purported” role as a stablecoin in the broader ecosystem.

Its disapproval of the product does not rest on the “assessment of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment,” the SEC added.

Grayscale initially filed its application in October 2021, when the first bitcoin futures-based ETF received approval to trade on the New York Stock Exchange. ProShares, Valkyrie and VanEck were the first to market.

A futures-based ETF allows an investor to buy or sell bitcoin at a predetermined price, as opposed to tracking the spot price of the underlying asset. 

A decision on Grayscale’s spot-based ETF had been held back as the regulator requested additional comment from the public. More than 11,400 comment letters were submitted to the SEC since November, and 99% were in support of Grayscale’s application, according to the asset manager. 

In March, the asset manager threatened legal action against the SEC if it continued to prohibit a spot crypto ETF. In June, the firm attempted to strengthen its legal team by hiring former US solicitor general Donald B. Verrilli, Jr. as a senior legal strategist. 

“The SEC is failing to apply consistent treatment to similar investment vehicles and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934,” Verrilli said in a statement.

Earlier this week, Grayscale CEO Michael Sonnenshein signaled optimism about the SEC’s impending decision in a letter to investors. He said the regulator’s actions in the past eight months suggested an increased recognition and comfort with the underlying bitcoin market.

Now the asset manager is expected to argue that the SEC must deliver fair treatment to bitcoin-based ETF products. Bitcoin is down more than 37% in the last month. The bellwether asset dipped below $20,000 on Wednesday before recovering slightly to $20,074 by press time, Blockworks Research data show.

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