Grayscale Sues SEC Over Rejected Bitcoin ETF Conversion

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  • Grayscale has sued the SEC over its rejection of its Bitcoin ETF application
  • Grayscale says the agency is in violation of the acts it seeks to enforce
  • The Bitwise ETF application was also rejected

Grayscale has launched legal proceedings against the Securities and Exchange Commission (SEC) after the agency rejected the fund’s attempt to convert its Grayscale Bitcoin Trust into a first spot Bitcoin ETF. In a move that had been hinted at yesterday, Grayscale took umbrage at the SEC’s rejection of its year-long effort to create a Bitcoin ETF from its GBTC fund, which cited the usual concerns over market manipulation and investor protection. At the same time, the Bitwise ETF application was also, unsurprisingly, rejected.

Grayscale Goes Nuclear

Grayscale began working on its GBTC-Bitcoin ETF conversion last April, making sounds that suggested it thought it had a good chance of success. However, given that the Bitcoin market is no less manipulated than it was during the ETF rush in 2018-19, it’s hardly a surprise that, like every application so far, it was rejected, with the SEC stating that the exchange connected with the application must be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”

Rumours were circulating yesterday that, should the application be rejected, Grayscale was going to launch legal proceedings against the decision, which is has indeed done, immediately putting to good use the services of former Solicitor General Donald B. Verrilli to head up the legal challenge.

Verrilli was hired by Grayscale just three weeks ago, which suggests it has known for around a month that its Bitcoin ETF application was on the rocks.

SEC Is “Capriciously in Violation” of Its Own Securities Laws

A statement from Grayscale cited Michael Sonnenshein, Grayscale’s CEO, saying that the company are “deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market”, before outlining the basis of its case against the agency:

…the SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934. There is a compelling, common-sense argument here, and we look forward to resolving this matter productively and expeditiously.

In terms of how long such a legal challenge could take, this was provided on Twitter by Bloomberg Intelligence ETF Analyst James Seyffart, a day ahead of the rejection notice:

With Grayscale now suing the SEC, the Bitwise ETF being rejected, and Bitcoin being in no better position as an ETF-able asset than it was five years ago, our prediction that there will be no Bitcoin ETF in 2022 is looking likely to come true.