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The judges at the US Federal Appellate Court questioned the Securities and Exchange Commission’s stance regarding the decision to reject Grayscale Investment’s application for a spot bitcoin exchange-traded fund.
A panel of three judges posed significant questions regarding the SEC’s stance on the matter, especially since it had previously approved Bitcoin futures products.
SEC’s Position Questioned
A panel of US federal appellate court judges has questioned the decision of the Securities and Exchange Commission (SEC) to reject Grayscale Investment’s application for a spot bitcoin exchange-traded fund. The judges observed that the agency had previously approved bitcoin futures products. The Securities and Exchange Commission had, last June, rejected Grayscale Investment LLC’s application to convert its spot Grayscale Bitcoin Trust into an exchange-traded fund (ETF). Justifying its decision, the SEC had stated that the proposal fell short of meeting anti-fraud and investor protection standards.
Grayscale was represented by former solicitor general Donald Verrilli Junior, who outlined the problem with the SEC’s decision, stating,
“The fundamental problem with the order is that it contradicts previous SEC orders giving the green light to Bitcoin futures ETPs that pose the same risk of fraud and manipulation and have in place the same CME [Chicago Mercantile Exchange] surveillance mechanism to protect against those risks.”
Previously, the SEC had approved investment products from a number of firms, including ProShares, Teucrium, VanEck, and Valkyrie, all linked to BTC Futures. As a result, the judges questioned the SEC on Grayscale’s argument, stating that as the regulatory body had approved certain surveillance agreements to prevent fraud in Bitcoin futures-based ETFs, the same should be satisfactory for Grayscale’s spot fund. A judge observed,
“It seems like it’s fine for an agency to say okay, we need some more information, but it seems there’s quite a bit of information here on how these markets work together, and the SEC has not offered any explanation... that the petitioners here are wrong.”
SEC Pushes Back
Appearing for the SEC, senior counsel Emily Parise contested that the offerings in question were not comparable to the Grayscale proposal because the surveillance mechanisms in place are not identical. Parise stated that the underlying assets in the proposed ETF are fragmented and unregulated, unlike the CME, which comes under the ambit of the Commodity Futures and Trading Commission (CFTC). Parise also dismissed the argument that spot and futures markets move together, pointing out that it is yet unclear whether the futures market leads to the spot market when affected by fraud and manipulation or vice versa, calling the evidence mixed at this point in time. For the Grayscale proposal, Parise stated that CME surveillance would only serve as a proxy for the surveillance of the spot markets.
A Pivotal Outcome
The ongoing case comes at a time when the crypto industry has repeatedly locked horns with the Securities and Exchange Commission over its crackdown on digital assets. The outcome of this specific case could vindicate the SEC’s position or clear a path for other companies to offer spot bitcoin exchange-traded funds if the decision is in favor of Grayscale. There are several other players whose spot bitcoin ETFs were rejected by the SEC. These include SkyBridge Capital, FMR LLC’s Fidelity, and Valkyrie Investments Inc.
Steven McClurg, Chief Investment Officer at Valkyrie, believes that a spot bitcoin ETF would not be approved for at least another year. Meanwhile, a Fidelity spokesperson was a little more optimistic, stating that the company was hopeful about having a constructive dialogue with the SEC. Meanwhile, Michael Sonnenshein, Grayscale Chief Executive Officer at Grayscale, stated that he believes a final ruling in the case could be expected by fall and remains hopeful for a favorable outcome.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.