SEC’s Approval of Riskier Bitcoin ETF Draws Criticism from Grayscale

Digital asset manager Grayscale’s lawyers have criticized the U.S. Securities and Exchange Commission (SEC) for approving a leveraged Bitcoin-based exchange-traded fund (ETF) at a time when the company is embroiled in a lawsuit against the regulator over the rejection of its spot Bitcoin ETF application.

The legal counsel lodged their disapproval through a letter addressed to the U.S. Court of Appeals for the District of Columbia Circuit, stating that the SEC had okayed a leveraged ETF that they deemed “riskier” than Grayscale’s traditional bitcoin-based futures exchange-traded products.

They argued that the SEC’s recent move implies a discriminatory treatment of spot Bitcoin ETPs, showcasing the filed letter on Twitter:

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

While Grayscale’s lawyers pointed out that the SEC could rescind its approval of all Bitcoin-based ETPs to correct the alleged discrimination, they stated the Commission made clear it had no such intention:

To be clear, we’re not saying products like this shouldn’t exist. Instead, we are calling to attention that there’s no good reason to continue to deny approval of spot products while leveraged futures products are allowed to trade. 5/6

— Grayscale (@Grayscale) July 10, 2023

The SEC had declined Grayscale’s application to convert its Bitcoin Trust into an ETF the previous year, resulting in the firm lodging an appeal against the agency for purported violation of the Administrative Procedures Act.

This led Grayscale CEO Michael Sonnenshein to tell Bloomberg that “I think all options are on the table” when asked if Grayscale will sue the SEC.

Grayscale did just that: It sued the SEC on June 30, claiming that the Commission has failed “to apply consistent treatment to similar investment vehicles, [acting] arbitrarily and capriciously.”

The lawsuit between Grayscale and the SEC, heard in March by the D.C. Circuit Court, is anticipated to conclude by year’s end.

The SEC’s endorsement of a leveraged Bitcoin ETF, seen by Grayscale’s legal team as a high-risk move, presents questions about the regulator’s decision-making consistency:

“While the Commission could theoretically correct its disctriminatory treatment of spot Bitcoin ETFs by rescinding its approval of all bitcoin-based ETPs […] The commissions apparent willingness to permit even a leveraged bitcoin futures ETP — a particularly high risk verision of a bitcoin futures product— makes it clear that the commission has no intention of even doing so.”

The SEC, however, has not officially replied to Grayscale’s latest contentions:

“Thus, the only way to eliminate the Commission’s unequal treatment of bitcoin-based ETPs is to allow proposed spot bitcoin ETPs like Grayscales to begin trading.”

However, the SEC still has yet to come around to the idea of a spot Bitcoin ETF. The SEC recently rejected multiple spot Bitcoin ETF applications from a number of firms on June 30, stating that the applications weren’t “sufficiently clear and comprehensive.”