Yesterday, the SEC finally rejected Grayscale’s application to issue an ETF based on spot Bitcoin in the US markets.
As promised, Grayscale is suing the SEC for failing to approve the ETF
In the lengthy (86-page) document with which the SEC announces its decision, it says that the application did not answer all of the questions posed by the agency regarding the prevention of market manipulation.
This point is rather curious, because it did not apply to the Bitcoin futures ETF applications that were approved several months ago by the SEC. Yet even the Bitcoin futures market can be manipulated by manipulating the price of Bitcoin on spot markets upstream.
In fact, Grayscale did not take it well at all, so much so that it sued the SEC.
To be fair, it appears that behind the SEC’s divergent approach to spot asset ETFs versus futures ETFs are precisely different federal laws that regulate the two derivative products differently.
This, however, does not explain why the SEC places as a condition for the issuance of a spot Bitcoin ETF that its market price cannot be manipulated, while at the same time it has not placed the same condition on the ETFs on Bitcoin futures.
Grayscale’s complaint was triggered only an hour after the SEC’s rejection, so they had long since prepared the 92-page request for review of the decision sent to the court. Then again, there were very few who expected that this time would be different, since the SEC has already rejected dozens of similar proposals over the years.
The biggest difference lay in the fact that Grayscale wanted to turn an existing fund (GBTC) into an ETF, but the SEC actually chose to ignore this particularity.
The SEC’s reasons for rejecting the application
It is also worth adding that besides the fear of market manipulation, the SEC also gave other justifications, such as one related to the risk of USDT playing too important a role within the crypto ecosystem, and the lack of oversight of the crypto market, but these seem minor concerns compared to the risk of manipulation.
According to Grayscale, it is unfair for the SEC to treat spot Bitcoin ETFs differently than it does ETFs on Bitcoin futures, which is why they asked for a review of the decision. Now it will be up to the courts to clarify whether or not that decision complies with the law.
Grayscale cites “common sense” as a reason to review the SEC’s decision, and the fact that ETFs on Bitcoin futures comply with all laws, but it is not certain that the court will feel the same way. A lot will depend on how the judges interpret the rules in force in the US, because if they were to interpret them literally as the SEC is doing we can hardly expect a different outcome.
So the game seems still wide open, but the glimmers for a Grayscale victory seem smaller and smaller.