Grayscale has made a new attempt to win US Securities Watch approval to convert the world’s largest digital investment vehicle into a fund traded on major Wall Street exchanges.
The asset manager has focused on the legal details in an effort to bolster its application with the Securities and Exchange Commission to transfer $40 billion from Bitcoin Trusts to an exchange-traded fund, according to a letter sent to the regulator.
Grayscale’s gambit comes as the Securities and Exchange Commission is deliberating over whether to give the green light for US exchange-traded funds to hold bitcoin, rather than derivatives linked to the cryptocurrency, for the first time. The regulator said it will make a decision on Grayscale’s implementation in early July at the latest.
Several competitors have already been reprimanded for their attempts to open similar funds and the Grayscale gambit represents one of the crypto industry’s last hopes of launching such a product in the near future. There are three other similar ETFs waiting for approval.
The SEC has opposed so-called spot ETFs due to concerns about trading currencies on unregulated platforms where monitoring is difficult and manipulation is a persistent problem. It has approved ETFs that hold cryptocurrency futures contracts, but those products are traded on platforms overseen by US financial regulators.
Grayscale is betting that the SEC’s acceptance earlier this month of crypto-futures tool Teucrium under the rules that will govern spot bitcoin ETFs can be used to advance its case for the regulator.
In a letter filed with the Securities and Exchange Commission this week, Grayscale said: “We believe the Teucrium order underscores the essential point . . .[that]When it comes to approval [exchange traded products]There is no basis for treating spot Bitcoin products differently from Bitcoin futures products.”
Craig Salem, Grayscale’s chief legal officer, added that after Teucrium’s approval, the SEC “effectively loses the ability to rely on the distinction” between rules governing futures ETFs and ETFs as a reason to reject funds tied to physical bitcoin.
The Securities and Exchange Commission declined to comment.
Some compliance professionals remain skeptical about whether Grayscale’s new legal gambit will pay off.
SEC President Gary Gensler has argued that the “largely unregulated” bitcoin market raises fears of fraud and manipulation. He also called on crypto platforms to register with the agency and argued that most tokens are securities and fall under the SEC’s jurisdiction.
Amy Lynch, founder and president of FrontLine Compliance, a regulatory advisory firm, said the Securities and Exchange Commission (SEC) approval of spot bitcoin ETFs will remain challenging until things are standardized including the funds’ pricing, valuation, maintenance and liquidity and made more transparent.
“Gensler will have to change his mind at this point,” Lynch added. “I don’t see him doing that unless there is a moment of light with these files that answer all the questions. And I think that’s a slim possibility.”
But crypto players argue that the development of the bitcoin market in recent years should allay these concerns.
“The markets themselves have gotten stronger since the first wave of ETFs were rejected in 2017,” Salem said, adding that cryptocurrency exchanges have beefed up protections with tight trade monitoring and use of technology similar to that of US national stock exchanges.
Matt Hogan, chief investment officer at Bitwise Asset Management — who has placed a pending order for a bitcoin-holding fund — said that while the maturity of the CME regulated spot bitcoin market was the “most important factor,” the broader cryptocurrency ecosystem was improving thanks to the launch of CME funds. Regulated traded investment abroad and the entry of more institutional players.
Timothy Spangler, partner at Dechert, said it was unclear what other information the SEC might require to approve bitcoin ETFs when other regulators such as Australia and Canada have approved these products.
He said that these countries “seem to be able to get comfortable” with the idea that “Bitcoin is an asset mature enough to be included in a publicly traded medium.”
“I fear that the opposition to including larger amounts of cryptocurrencies in individual financial products is more philosophical than it is to the details,” Spangler added. “I don’t think this is an inch game.”