- The SEC has responded to the lawsuit filed against by Grayscale over a Bitcoin ETF earlier this year
- Grayscale had argued that the SEC was failing to be consistent in the application of its own laws
- The SEC points to potential risks with a spot Bitcoin ETF, including price manipulation and a lack of oversight
The Securities and Exchange Commission (SEC) has made its first comments on the lawsuit filed against it by Grayscale over its decision not to award the company a Bitcoin ETF. Grayscale had applied to turn its GBTC platform into a Bitcoin ETF, but when this was rejected in June, Grayscale filed legal proceedings on the very day. The SEC argued that “the two products are not the same” and have “fundamental differences in the ability to detect and deter fraud and manipulation”, which is why they rejected the conversion.
Grayscale Accused SEC of Inconsistency
Grayscale had been planning to turn its GBTC product into a Bitcoin ETF for some time, formally beginning work in April 2021 and hiring Donald B. Verrilli, the Solicitor General under the Obama administration, to try and push its case as the deadline neared.
The SEC rejected the application on June 30 last year, to which Grayscale responded by filing a lawsuit, arguing that the agency was “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.”
Six months later the SEC has had its say, unsurprisingly dismissing Grayscale’s case, arguing that there were significant differences between the GBTC and Bitcoin ETF products that “reasonably support treating the two products differently.” The SEC also pointed out that spot ETFs are tradable only on the Chicago Mercantile Exchange, which the SEC pointed out is overseen by federal regulators and performs “extensive surveillance of the trading activity on its market.”
Alongside this argument, the SEC also pointed to prior statements made by the Commodities Futures Trading Commission (CFTC) that its permission to trade Bitcoin futures “does NOT provide for … value judgements about the underlying spot market.”
SEC Worried About Market Surveillance
Another issue the SEC pointed to with awarding a Bitcoin ETF is one it has raised several times before – surveillance. The agency is concerned that a Bitcoin ETF could be vulnerable to “fraudulent and manipulative conduct,” including wash trading, price manipulation by “whales,” “malicious control of the bitcoin network,” hacking, insider trading, “manipulative activity involving purported ‘stablecoins’” and fraud with crypto exchanges.
Grayscale itself warned in its Bitcoin ETF application, as it is duty bound to do, of the “unregulated nature and lack of transparency” surrounding the operations of spot-trading platforms, the risks of hacking and the risk of “fraud and manipulative activity” at Bitcoin trading platforms in particular.
The SEC bolstered its case by highlighting a statement from the New York Stock Exchange that “fraud and manipulation may exist and that bitcoin trading on any given exchange may be no more uniquely resistant to fraud and manipulation than other commodity markets.”
Grayscale’s reply to the SEC is due on January 13, 2023, with the next response by the SEC due by February 3.
