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Grayscale in court challenging SEC on rejecting Spot Bitcoin ETF

Grayscale
TL;DR Breakdown
  • SEC disapproved Grayscale’s request to establish a Spot Bitcoin ETF.
  • Grayscale countered the disapproval by taking the SEC to court to compel them to approve.
  • The lawsuit guarantees a showdown in the justice corridors.

Grayscale has sued the US SEC after turning down their call for a Spot Bitcoin ETF. The U.S. Securities and Exchange Commission (SEC) decided not to approve Grayscale’s application. They cited their reasons, and Grayscale felt they were flimsy.

The Securities and Exchange Commission (SEC) found that the plan was below standard. As a result, it failed to meet the threshold designed to control market manipulation and fraud. However, they stated that they did not base their choice on whether Bitcoin or distributed ledger tech has purpose or value as an enterprise.

The SEC discovered and compiled a list of potentially fraudulent and manipulative sources in the spot market for bitcoin. There was a remarkable amount of “manipulative conduct involving alleged “stablecoins.” Besides, the manipulative conduct involved wash trading, whale manipulation, exchange, and network hacking. Moreover, the transmission of incorrect information was also a concern.

The legal obstacle in Grayscale

Grayscale Boss Michael Sonnenshein retaliated immediately, filing a lawsuit on June 30. The SEC is said to have abused both the Administrative Procedure Act. Also, the Securities Act in this matter, according to the complaint:

Why are ETFs that hold futures on one asset acceptable to the SEC but not ETFs that contain the same asset? “Grayscale asked in a petition relevant to the decision.” Also, Donald B. Verrilli Jr., Senior Legal mind at Grayscale and a retired Solicitor General in the Obama administration made some comments:

Equivalent asset classes are not treated equally by SEC regulators. As a result, they are breaking the Administrative Procedures Act (APA). Also, the Securities Exchange Act of 1934 is the same way.

Donald B. Verrilli Jr

Sonnenshein asserts that Grayscale is aware of the vested interests of American business people. Grayscale’s biggest Bitcoin fund, GBTC, has shown great interest in becoming a spot Bitcoin ETF. According to the group’s statement, this is the case. Ycharts says the GBTC fund is trading at a negative premium of -29 percent. This indicates that the fund is selling at a discount.

Grayscale holds that converting their trust into an ETF will mitigate the price of GBTC. GBTC is a close-ended fund. It’s pretty different from an ETF. Thus, it can neither be created nor destroyed to maintain demand shifts. The firm insists that the conversion has the potential to unlock almost 8 billion dollars in value for dealers.

During the 240-day phase allotted for the evaluation, Grayscale initiated a comment campaign. It led to a record-breaking submission total of more than 11,400 answers. Out of the campaign, 99 percent of respondents supported the fund conversion.

It is profoundly disappointing to Americans. The SEC stands to inconsiderably ban spot Bitcoin ETFs from operating in the U.S. market. It is a decision that should not be welcome at all. The notion that the SEC has already approved comparable Bitcoin ETFs based on futures contracts that are still reliant on the underlying spot price of the asset is the essential point of the argument.

The bone of contention

James Seyffart of Bloomberg tweeted a probable chronology of events that could take place in the case’s aftermath. The case has the potential to drag on for the next couple of years. Most crypto lovers are disappointed by the SEC’s stance on rejecting the Bitcoin Spot ETF. What’s shocking is even a commissioner in the SEC, Hester Pierce, is disappointed.

Grayscale is not taking the SEC to stand lightly. It is out to push the regulator to change its initial project into a Spot ETF. The lawsuit might compel the SEC to approve Grayscale’s request. However, most people anticipate that the case might drag to several years.

It will be interesting to watch how this lawsuit unfolds. SEC is always keen on approaches they take in handling situations. Grayscale’s strong stand on this move makes it an interesting to follow.

Nellius Irene

Nellius Irene

Nellius Irene is a cryptocurrency investor and journalist who has been in the nascent space since 2018. She has researched and written on several crypto-related topics including non-fungible tokens (NFTs), decentralized finance (DeFi), fundraising, mining, etc. Her major focus is covering regulatory events that are capable of shaping the entire crypto ecosystem.

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