Grayscale notes SEC inconsistency in latest case for spot bitcoin ETF

Asset manager Grayscale has made a new appeal to the Securities Exchange Commission to upgrade its Grayscale Bitcoin Trust into an exchange-traded fund (ETF). 

In a letter to the agency dated April 18, Grayscale’s legal counsel Davis Polk & Wardwell noted that the SEC’s recent approval of the so-called Teucrium Bitcoin Futures Fund provides a basis on which it should approve Grayscale’s own spot-based ETF product. 

“We believe the Teucrium order confirms the fundamental point made in our November 29, 2021 letter in support of the above-referenced proposal: when it comes to approving ETPs, there is no basis for treating spot Bitcoin products differently from Bitcoin futures products,” the letter said. 

The agency has yet to approve a spot ETF, citing concerns about market manipulation among exchanges that facilitate the trade of spot bitcoin. Bitcoin futures, however, trade on US-based exchanges, which are under the regulator purview of the Commodities Futures Trading Commission.

Still, the approval of the Teucrium product is striking given it was approved under the Securities Exchange Act of 1934 — as opposed to the Investment Act of 1940. The ’34 Act is the same framework under which would Grayscale would launch its ETF.

“So SEC can’t use the distinctions between the ‘40 Act (which is what all prior futures ETFs were approved under) anymore,” a well-placed source commented.

In Grayscale’s view, the agency would be acting arbitrary and capricious if it approves a futures-based fund under the ’34 Act and not a spot-one.

From the letter: “The Teucrium order confirms that 1940 Act registration is not a basis for the Commission to approve one product and reject another.“

Grayscale also contends that a futures-based fund is not necessarily exposed to less risk than a spot fund since pricing for futures is based on data compiled across spot exchanges.

“Because both spot and futures-based Bitcoin products face exposure to the same underlying Bitcoin market, any fraud or manipulation in the underlying market will affect both products in the same way,” the letter reads. “The existence of these risks therefore cannot serve as justification for denying approval to one product once approval for the other product has been granted.”