OVERVIEW:
- The SEC declined Grayscale's bid for a spot bitcoin ETF on Wednesday, June 29, citing market manipulation concerns.
- Grayscale, manager of the world's biggest bitcoin fund, met in secret with the SEC in May to convert its flagship fund into an ETF.
SEC Refuses Grayscale's ETF for Market Manipulation Worries
After authorities rejected its request to transform the investment vehicle into an exchange-traded fund, Grayscale, which oversees the biggest bitcoin fund in the world, said it would file a lawsuit against the U.S. Securities and Exchange Commission.
The SEC denied Grayscale's request for a spot bitcoin exchange-traded fund on June 29, citing the investment manager's refusal to provide information on worries about market manipulation.
The watchdog is worried that the Grayscale plan will not provide investors with enough safeguards.
In October 2021, Grayscale sought to have its Bitcoin Trust, or GBTC, become an ETF, but the decision was repeatedly postponed. Grayscale has increased pressure on the watchdog to support it, including providing a means for individuals to email their support immediately.
Grayscale promptly appealed the SEC's judgment to the U.S. Court of Appeals for the District of Columbia Circuit in a petition. Donald B. Verrilli Jr., a former solicitor general of the United States, is Grayscale's chief legal strategist, leading a group of lawyers from Davis Polk & Wardwell in this case.
Verrilli claimed that the SEC is behaving arbitrarily and capriciously in violation of the Administrative Procedure Act and the Securities Exchange Act of 1934 by failing to treat identical investment vehicles consistently.
A statement from the SEC was not immediately available outside of regular U.S. business hours.
In light of prior decisions to approve other bitcoin-based ETFs, such as ones based on futures markets and one that enables investors to be short or bet against the cryptocurrency, Grayscale claims the SEC's approach is contradictory.
The SEC's approval of the first U.S. spot bitcoin ETF, a step that would make cryptocurrencies more accessible to institutional investors, was what the cryptocurrency bulls had been banking on.
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The decision to reject Grayscale's proposal for a bitcoin ETF adds to a string of recent unfavorable headlines for cryptocurrencies. Three Arrows Capital, a troubled cryptocurrency hedge firm, went out of business earlier this week.
On Wednesday, June 29, Bitcoin traded at $20,085, down 1% from the previous day. Since the bubble's peak in November 2021, the aggregate market value of cryptocurrencies has decreased by $2 trillion.
Grayscale Manager Assembled in Secret With SEC in May
Grayscale, the asset management in charge of the largest bitcoin fund in the world, held a secret meeting with the Securities and Exchange Commission in May this year to convince the watchdog to agree to the conversion of its flagship fund into an ETF.
According to a 24-page presentation seen by CNBC, converting the Grayscale Bitcoin Trust into an NYSE-traded ETF will increase security and increase access to bitcoin while releasing up to $8 billion in value for investors.
This is due to the trust's average 25% price discount to the price of its underlying asset since the beginning of 2021, which should vanish upon conversion, said the business.
According to Grayscale, over 850,000 U.S. accounts control around 3.4 percent of the total bitcoin supply held by GBTC. Before the recent crypto retrenchment reduced its value to $20.1 billion, the fund, which allowed institutional investors like Ark Invest's Cathie Wood to wager on bitcoin, grew to more than $30 billion.
Additionally, the company pointed out the growing disclosures related to GBTC and its network of partners, including BNY Mellon and Coinbase, and is prepared to assist with the conversion process.
