Grayscale says U.S. SEC set bar too high for Bitcoin funds

8:51 pm Tuesday, October 11th, 2022

By Jody Godoy

(Reuters) – Grayscale Investments said in a court filing Tuesday that the U.S. Securities and Exchange Commission set the bar too high for spot bitcoin exchange-traded funds, which have so far not been approved for listing on U.S. exchanges.

Grayscale sued the regulator in June, after the SEC denied its bid to convert its Grayscale Bitcoin Trust, the world’s largest bitcoin fund, into an ETF for listing on Intercontinental Exchange Inc’s NYSE Arca exchange.

The regulator had said that the proposal did not meet standards designed to prevent fraudulent practices and protect investors.

The SEC has rejected over a dozen spot bitcoin ETF applications, and approved several bitcoin futures-based ETFs. The rejections have focused on applicants’ lack of surveillance-sharing agreements with regulated markets relating to the spot funds’ underlying assets. Such agreements entail sharing trade data and other information to allow the exchange to detect manipulation.

Grayscale argued in the court filing that the SEC had not applied its standards evenly to spot bitcoin ETFs and bitcoin futures-based ETFs, even though both types of funds are both fundamentally tied to the price of bitcoin.

“There is only one reasonable conclusion to draw: the Commission is treating spot bitcoin ETPs with special harshness based on its opinion about bitcoin’s merits as compared to other types of investments,” the company said in the filing.

There is no spot bitcoin market that the SEC considers to be regulated, Grayscale said. But the NYSE Arca had entered a surveillance-sharing agreement with the Chicago Mercantile Exchange, where bitcoin futures trade, it said.

Since the SEC deemed other agreements with CME sufficient to prevent fraud in bitcoin futures-based ETFs, the same should apply to bitcoin spot ETFs since both types of fund rely on the price of bitcoin, Grayscale said.

Grayscale also argued the SEC acted outside its authority by not accepting other means of mitigating fraud risk.

(Reporting by Jody Godoy in New York; Editing by David Gregorio)