Grayscale Demands to Know Why Riskier Leveraged ETFs Are Approved

Table of Contents

• Grayscale Applies for Spot Bitcoin ETF
• Grayscale Questions Why Riskier Products Receive Regulatory Approval
• SEC’s Arguments Lack Consistency

Grayscale Investments has sent a letter to the US Court of Appeal, demanding to know how the SEC can allow a leveraged 2x Bitcoin ETF to be approved but not a spot Bitcoin ETF.

A lawyer for Grayscale Investments sent a letter to a US Circuit Court, questioning the SEC’s refusal to allow Grayscale’s Bitcoin ETF (exchange-traded fund) to trade.

On Monday, Donald B Verilli, Jnr. sent a letter to Judge Mark Langer of the US Court of Appeals, pointing out that the US SEC has allowed Volatility Shares’ 2X Bitcoin Strategy ETF (BITX) to trade.

Today, our attorneys filed a letter with the DC Circuit highlighting the disparity between the SEC’s approval of a leveraged #bitcoin futures ETF while continuing to deny approval of spot bitcoin ETFs like $GBTC. Let’s dive deeper. 🧵/6 pic.twitter.com/z7WyGBthhT

— Grayscale (@Grayscale) July 10, 2023

Grayscale Applies for Spot Bitcoin ETF

Verilli’s questions come after Grayscale applied to convert its spot Bitcoin Trust into a spot Bitcoin ETF, to which the SEC answered no.

Grayscale believes that BITX is a riskier product than the one regulators refuse to approve and poses the question about the rationality behind allowing the trade of a riskier product but refusing the trade of a safer one.

Grayscale Questions Why Riskier Products Receive Regulatory Approval

In the letter, Verilli argued:

It exposes investors to an even riskier investment product than the traditional bitcoin futures exchange-traded products . . . which encompass risks related to both the futures and spot bitcoin markets.

He noted that the 2X Bitcoin Strategy ETF seeks to double the performance of the S&P CME Bitcoin Futures Daily Roll Index every day and highlighted that it is leveraged.

Verilli further quoted BITX’s registration statement, which clarifies that the product may lead to massive losses if left in the hands of those who do not have enough knowledge about it. In its stamen, BITX’s conceded its product is suitable for “knowledgeable investors.”

Verilli also argued that approving the Volatility Shares ETF contradicts the SEC’s view against any fund dealing with the spot market.

He wrote:

The fact that the Commission has allowed a leveraged bitcoin futures ETP to begin trading demonstrates that the Commission continues to arbitrarily treat spot Bitcoin ETPs differently than bitcoin futures ETPs.

SEC’s Arguments Lack Consistency

The SEC’s refusal of Grayscale’s application rested on the argument it lacked an appropriate plan to monitor the impact on spot prices stemming from fraud and market manipulation. Grayscale rejected the SEC’s statement by saying futures prices themselves are drawn from spot markets.

The SEC’s rejection of the Volatility Shares ETF shows the agency’s inconsistency. Verilli argued in his letter that by dealing with futures markets using leverage to achieve larger returns, the fund exposes investors to higher risk than a spot or traditional ETF would. Mr Verilli claims his argument should invalidate the SEC’s reason for rejecting Grayscale’s filing.

Verilli stated:

While the commission could theoretically correct its discriminatory treatment of spot bitcoin ETPs by rescinding its approval of all Bitcoin-based ETPs, the Commission’s apparent willingness to permit even a leveraged bitcoin futures ETP—a particularly high-risk version of a Bitcoin futures product—makes clear [it] has no intention of doing so.

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.