Grayscale writes a letter to the SEC, accuses the regulator of violating the law

On Monday, Grayscale Investments attorneys issued a letter to the secretary of the US Securities and Exchange Commission (SEC), claiming that the agency is violating the Administrative Protections Act (APA) by discriminating against Bitcoin spot ETFs.

In the letter, the crypto asset manager argued that the agency’s approval of Bitcoin futures-based ETFs, but not Bitcoin spot-based ETFs is “arbitrary and capricious.”

The letter

While the Grayscale Bitcoin spot ETF application is pending, the crypto asset manager’s attorneys at Davis Polk wrote the agency, arguing it 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.”

Last night our attorneys at Davis Polk sent a letter to the SEC arguing that approval of #Bitcoin futures-based ETFs, but not #Bitcoin spot-based ETFs, like $GBTC, is “arbitrary and capricious,” and therefore in violation of the Administrative Procedure Act (APA).

— Craig Salm (@CraigSalm) November 30, 2021

In the letter, they argued that these two types of investment products “do not present meaningfully different risks of fraud and manipulation.”

“The APA requires the SEC to treat *like* situations *alike* absent a reasonable basis for different treatment. This means the SEC must treat similarly situated investment products similarly,” clarified Craig Salm, Legal VP at Grayscale Investments, on Twitter.

The move comes following the SEC’s recent rejection of VanEck’s Bitcoin spot ETF application.

A spot ETF would allow investors to trade on the current price of the asset, hence offering a more direct exposure to Bitcoin.

Grayscale’s arguments

Earlier this year, the SEC has approved three Bitcoin futures ETFs – from Valkyrie, ProShares and VanEck.

These futures-based ETFs don’t directly own Bitcoin, and are not tied to the spot price, but are based on futures contracts, hence tracking the future price of Bitcoin.

The ProShares Bitcoin Strategy ETF was the first approved and saw unprecedented success, logging $1 billion in assets under management in less than two days.

However, the SEC has been reluctant to approve Bitcoin spot ETF applications.

According to the letter Grayscale’s attorneys wrote, “the Commission’s standard for approving the listing of spot Bitcoin ETFs is arbitrary and, in practice, impossible to meet.”

“This is a new argument in the context of Bitcoin ETFs that wasn’t possible until the approval of the first Bitcoin futures-based ETF and subsequent rejection of yet another spot-based ETF,” Salm noted.