US court questions SEC rejection of Grayscale’s Bitcoin Fund

The US Federal Court of Appeals judges questioned the Securities and Exchange Commission’s position on the decision to reject Grayscale Investment’s application for a spot bitcoin exchange-traded fund.

A three-judge panel asked important questions about the SEC’s stance on the matter, especially since it had previously approved Bitcoin futures products.

SEC position questioned

A panel of U.S. Federal Court of Appeals judges has questioned the Securities and Exchange Commission’s (SEC) decision to deny Grayscale Investment’s application for a spot bitcoin exchange-traded fund. The judges noted that the agency had previously approved bitcoin futures products. The Securities and Exchange Commission rejected Grayscale Investment LLC’s application last June to convert its spot Grayscale Bitcoin Trust into an exchange-traded fund (ETF). To justify its decision, the SEC had stated that the proposal failed to meet anti-fraud and investor protection standards.

Grayscale was represented by former Attorney General Donald Verrilli Junior, who outlined the problem with the SEC’s decision, stating:

“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.”

Previously, the SEC had approved investment products from a number of companies, including ProShares, Teucrium, VanEck, and Valkyrie, all linked to BTC Futures. As a result, the judges questioned the SEC on Grayscale’s argument, stating that since the regulator had approved certain oversight agreements to prevent fraud in Bitcoin futures-based ETFs, the same should be satisfactory for Grayscale’s spot fund . A judge found,

“It seems like it’s okay for an agency to say okay, we need a little more information, but it seems like there’s quite a bit of information here about how these markets work together, and the SEC hasn’t made any statement… that the petitioners here are wrong.

SEC pushes back

Appearing before the SEC, senior counsel Emily Parise disputed that the offerings in question were not comparable to the Grayscale proposal because the existing monitoring mechanisms are not identical. Parise stated that the underlying assets in the proposed ETF are fragmented and unregulated, unlike the CME, which falls under the scope of the Commodity Futures and Trading Commission (CFTC). Parise also rejected the argument that spot and futures markets move together, pointing out that it is still unclear whether the futures market leads to the spot market when affected by fraud and manipulation or vice versa, and called the evidence mixed at this point. For the Grayscale proposal, Parise stated that CME oversight would only serve as a proxy for overseeing the spot markets.

A crucial result

The pending case comes at a time when the crypto industry has repeatedly sued the Securities and Exchange Commission over its crackdown on digital assets. The outcome of this particular case may justify the SEC’s position or pave the way for other companies to offer spot bitcoin exchange-traded funds if the decision is in Grayscale’s favor. There are several other players whose spot bitcoin ETFs have been rejected by the SEC. These include SkyBridge Capital, Fidelity of FMR LLC and Valkyrie Investments Inc.

Steven McClurg, chief investment officer at Valkyrie, believes that a spot bitcoin ETF will not be approved for at least another year. Meanwhile, a spokesman for Fidelity was a little more optimistic, stating that the company was hopeful about constructive dialogue with the SEC. Meanwhile, Michael Sonnenshein, Grayscale Chief Executive Officer at Grayscale, said he believes a final ruling in the case can be expected by the fall and remains hopeful for a favorable outcome.

Disclaimer: This article is for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial or other advice.

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