Grayscale Investments has filed a lawsuit against the U.S. Securities and Exchange Commission following the agency’s rejection of its application to convert its Bitcoin Trust into an exchange-traded fund.
Grayscale Application Rejected
The agency rejected Grayscale’s application on Wednesday, saying it had concerns about the potential impact of the company’s subsidiary, known as Tether, on the broader bitcoin ecosystem. It also noted that the lack of a surveillance agreement between a regulated exchange and a large market could prevent the smooth functioning of the bitcoin trade. Meanwhile, Grayscale reiterated concerns expressed by the regulator years ago in rejection of other spot bitcoin ETF applications.
In response to the Securities and Exchange Commission’s order, Grayscale, a subsidiary of Digital Currency Group, asked the D.C. Circuit Court of Appeals to review the order.
In 2022, Grayscale announced that it would sue the Securities and Exchange Commission if they denied it a request for a hearing. To address this issue, the company turned to Don Verrilli, a former U.S. Attorney General. Notably, Verrilli has experience in APA proceedings.
“Grayscale supports and believes in the SEC’s mandate to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation – and we are deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market,” Grayscale CEO Michael Sonnenshein said in a statement Wednesday.
The company will argue that the SEC should allow the exchange-traded funds (ETFs) related to bitcoin futures to operate like other products.
Few Approvals from SEC are Concerning
In June, Verrilli told reporters that the approval of futures exchange-traded funds by the Securities and Exchange Commission shows that the underlying market is reliable.
“This is a place where common sense has a really important role to play. You’ve got a situation now in which you have certain kinds of exchange traded funds, one that is focused on bitcoin futures, and the SEC has approved that, the SEC has given it the seal of approval,” he said. “In order to do so it had to make a determination that that giving this approval was consistent with the securities laws, and in particular, that there wasn’t a sufficient underlying risk of fraud and manipulation.”
SEC has so far approved only a handful of bitcoin futures exchange-traded funds (ETFs) to trade. These are based on the price of bitcoin and are designed to track the underlying asset’s performance.
Supporters of Bitcoin exchange-traded funds argue that the underlying price of bitcoin is still the same as that of futures. However, the SEC notes that the market is regulated by the same agency that oversees the futures market of Chicago-based exchange operator CME Group.
The Call for Regulation
Over the past year, the SEC has rejected over a dozen proposals for spot bitcoin exchange-traded funds. The agency cited insufficient surveillance-sharing agreements as one factor preventing it from issuing these products.
In a statement released on Monday, Gary Gensler, the chairman of the SEC, said that the agency’s efforts to address the crypto market’s uncertainty could help pave the way for a more stable and prosperous industry.
During an interview with CNBC, Gensler referred to bitcoin as the only type of cryptocurrency he would classify as a commodity. He said that his predecessors had also noted that it was a commodity.
He also noted that the SEC should regulate other types of cryptocurrencies. In addition, they should treat them as securities because they have the same characteristics as traditional financial assets. According to Gensler, the public is eager to get a return on their investments due to their growth potential.