The Grayscale Bitcoin Trust, which holds $38 billion worth of bitcoin as shown above, has sent a pre-action letter to SEC arguing their decision to allow a futures ETF, but not a spot bitcoin one, is “arbitrary and capricious.” Craig Salm, Grayscale’s Vice President in the Legal Department, said:
“Last night our attorneys at Davis Polk sent a letter to the SEC arguing that approval of Bitcoin futures-based ETFs, but not Bitcoin spot-based ETFs, like $GBTC, is ‘arbitrary and capricious,’ and therefore in violation of the Administrative Procedure Act (APA).
This is a new argument in the context of $BTC ETFs that wasn’t possible until the approval of the first Bitcoin futures-based ETF and subsequent rejection of yet another spot-based ETF. So, what is this new argument?
The APA requires the SEC to treat like situations alike absent a reasonable basis for different treatment. This means the SEC must treat similarly situated investment products similarly.
Bitcoin ETF products — Bitcoin futures-based ETFs registered under the ‘40 Act and Bitcoin spot-based ETFs registered under the ‘33 Act — are an example of two like situations that should be treated alike… but are no longer.
Arguments citing the added protections of the ‘40 Act vs. ‘33 Act or CME bitcoin futures being more ‘regulated’ than spot bitcoin – are misplaced in the context of Bitcoin ETF approvals.”
The decisions of the Securities and Exchanges Commission (SEC) to allow futures bitcoin ETFs but not spot, has led to a bizarre situation where derivatives, like futures, are considered a safer investment than actually holding the spot asset in contradiction of long held thinking that derivatives are obviously riskier.
They’re riskier because often they rely on leverage and because you can’t hold a derivative, you have to close the contract at the end of each month and buy a new one, something that can lead to as much as 30% in losses over the spot asset.
In the case of Grayscale they’ve been further placed in a difficult position because its loophole that allows accredited investors to list bitcoin shares publicly requires the shares are first held for six months.
That period can create a significant discount or premium which may be exacerbated from competition by a free floating futures bitcoin etf.
The first such ETF however, BITO, still has just $1 billion in assets as investors might potentially use it in a strategy, but are more comfortable with a spot ETF preferably where the shares are redeemable for actual bitcoin.
Grayscale thus might be more worried about competition from Europe where four spot crypto ETPs launched just this week. Americans thus might digitally make their journey to Europe, instead of Grayscaling, which might exacerbate GBTC’s discount.
Hence Grayscale probably has no choice but to take it to court if required as this space matures and professionalizes, and thus is able to use all avenues legally available.
If it came to it, then the booming crypto stock market in Europe would be one strong evidence in court for SEC’s capricious decision making due probably mostly because its current chair, Gary Gensler, is a former Goldman Sachs banker.
Thus a bitcoin spot ETF is probably coming as the crypto industry now, after much debate, turns towards fighting SEC with the Ripple case, some suggesting, putting SEC on trial while Terra has sued SEC after its co-founder, Do Kwon, was publicly served in an “intimidating and embarrassing manner.”
As such, as dialogue with the stock regulator has now come to a halt due to a loss of trust, the crypto industry is finally doing what it should have done long ago: having that ‘dialogue’ in court where it belongs.