Judges Hear Oral Arguments in Grayscale Lawsuit Against SEC Over BTC Spot ETF Rejection

A panel of judges heard oral argument in the Grayscale Investments lawsuit against the U.S. Securities and Trade Commission (SEC) on March 7. Grayscale is challenging the SEC’s order to deny Grayscale’s application to create a Bitcoin (BTC) spot exchange-traded fund (ETF). The SEC issued its order on July 6, 2022.

Former Solicitor General Donald Verrilli Jr. represented Grayscale and SEC senior counsel Emily Parise spoke on behalf of the SEC before Chief Judge Sri Srinivasan and Justices Neomi Rao and Harry Edwards in the District of Columbia Circuit Court of Appeals. Verrilli opened and said:

“The fundamental problem with the order is that it contradicts previous SEC orders green-lighting Bitcoin futures ETPs that carry the same fraud and manipulation risk and have the same CME. [Chicago Mercantile Exchange] surveillance mechanism to protect against those risks.”

The SEC has approved investment products from Teucrium, ProShares, VanEck and Valkyrie linked to BTC futures.

Parise argued that the offering is not comparable to the Grayscale proposal because the monitoring mechanisms are not identical, as the spot markets underlying the asset in the proposed ETF are “fragmented and unregulated”, unlike the CME, which is regulated by the Commodity Futures Trading Commission (CFTC).

Parise then rejected the argument that Bitcoin spot and futures markets move together 99.9% of the time, pointing out that it is unclear whether the futures market leads the spot market when affected by fraud and manipulation, or vice versa. versa.

Related: GBTC approval could bring investors “a few billion dollars”: CEO of Grayscale

For the proposed grayscale product, CME surveillance would serve as a proxy for spot market surveillance. In addition, the 99.9% correlation is based on “once-a-day” futures prices, regardless of intraday prices, Parise added.

The judges asked Parise more questions than Verrilli, leading crypto community commentators to interpret their leanings as favorable to shades of gray. For example, they asked for clarification on how Teucrium’s SEC-approved product differs from Grayscale’s, and why spot and futures markets may be affected differently by fraud and manipulation.