Earlier this week, the U.S. Securities and Exchange Commission rejected two applications for bitcoin spot exchange-traded funds (ETFs). One of the firms, Grayscale Investments, responded by filing a lawsuit against the agency. But not everyone is convinced that it’ll work.
“The SEC rejecting both Bitwise and Grayscale’s GBTC spot bitcoin ETF applications is not at all surprising because it follows the same precedent that other asset managers have endured,” Leah Wald, CEO of Valkyrie Investments, said in a Twitter thread. “Suing the SEC isn’t likely to succeed.”
Wald’s Nashville-based digital asset investment firm has over $1 billion in assets under management. Valkyrie also is home to one of the SEC-approved bitcoin futures ETFs, Valkyrie Bitcoin Strategy ETF (BTF), which was approved last year.
In the past, SEC Chairman Gary Gensler has said crypto exchanges should register with the regulator just like traditional securities exchanges. While the agency has approved a handful of long and short exposure bitcoin futures ETFs, it has denied every spot bitcoin ETF that has applied to date.
The SEC has imposed enormous costs on investors “with no legitimate rationale,” Senator Pat Toomey, Republican of Pennsylvania, tweeted on Friday.
“Their blanket rejection of numerous Bitcoin spot ETFs — despite the SEC’s prior approvals of Bitcoin futures ETFs — demonstrates how this SEC has arbitrarily chosen to deny investors access to financial products,” Toomey tweeted.
“We’re in a place where the SEC is comfortable with futures-based bitcoin ETFs but still not approving spot-based bitcoin ETFs,” Craig Salm, chief legal officer at Grayscale, said to TechCrunch. “So it’s a very straightforward argument, if you’re OK with one, you should be OK with others. They have the same considerations as far as bitcoin ETFs go.”
The SEC made clear in its response that it views the underlying holdings — futures versus spot — are fundamentally different, in particular because the former trades on a regulated market whereas the latter is traded on unregulated markets, Ryan Shea, crypto economist at Trakx, said to TechCrunch.
“The SEC also dismissed Grayscale’s argument that arbitrage opportunities between derivative and spot markets would tend to counter any attempt to manipulate the spot market — the SEC’s primary reason for rejecting the application,” Shea added.
“Since the beginning of this process, we have largely agreed with the agency that it would be challenging to put an unregulated asset into a regulated wrapper,” Wald said in a tweet. “But there are other far more concerning elements to $GBTC that are worth exploring here.”
Given that Grayscale Bitcoin Trust (GBTC) is trading at a 30.7% discount, millions of investors, hedge funds and institutions — including Cathie Wood’s ARK Investment Management — have piled capital into it to take advantage of a potential massive arbitrage trade if an ETF conversion transpires.
Bitcoin is currently trading around $19,000, down 58.7% year to date, according to CoinMarketCap data. But GBTC converting to an ETF would have a significantly negative impact on all its shareholders and the overall price of bitcoin, Wald said.
As a lawyer, Salm said he couldn’t “speak to those economics” and added that “there’s a lot of variables at play and it’s hard to say what would happen as a result if spot bitcoin ETFs are approved.”
“If an ETF conversion were to happen, there is likely to be a flood of redemptions to close that trade and lock in these profits,” Wald said. “This would be especially true if underlying [bitcoin] is still in its current range with limited short-term upside.”
Grayscale filed its lawsuit almost immediately after its rejection on Wednesday, and while any litigation timing is inherently uncertain, based on conversations they’ve had with legal counsel, the process at the appellate level can take nine to 12 months, “but could be longer or shorter,” Salm said. Others estimate that it could take up to 18 months to resolve.
“Knowing this, [Grayscale] has decided the best way to remain part of the conversation is to sue the regulator because these lawsuits are never resolved immediately and could even take a year-and-a-half to resolve,” Wald wrote. “You know what else would take about 18 months? A digital and crypto asset exchange applying to the SEC to be a registered trading platform and succeeding.”
In theory, the SEC could oversee and approve another spot bitcoin ETF faster than Grayscale’s lawsuit timeline.
“If there are developments around regulations on spot exchanges, if something else happens beyond our case, we will look at that also as a reason why the SEC should approve spot bitcoin ETFs,” Salm said. “Although regulation of the spot crypto exchanges would bring more protections, it shouldn’t be a requirement for the spot bitcoin ETF, since it has approved futures bitcoin ETFs already.”
Given that Canada, Australia, Singapore and Brazil have already launched spot bitcoin ETFs, the pressure on the SEC to allow for a similar product in the U.S. is set to continue, Shea said, notwithstanding the SEC’s current objections.
“Not many people expect this suit to go in favor of Grayscale, and there isn’t much precedent for such an outcome to occur,” Wald tweeted. “But in order to keep assets flowing in and ensure institutions remain engaged, this is the only real move they have left.”