Grayscale is suing the Securities and Exchange Commission (SEC) for rejecting the proposed Spot Bitcoin ETF

  • The Securities and Exchange Commission says Grayscale’s proposed spot Bitcoin ETF has failed to meet the standard required to prevent fraud and manipulation
  • The asset manager asked the US Court of Appeals to review the decision of the Securities and Exchange Commission

One of the world’s largest digital asset managers sued the US Securities and Exchange Commission (SEC) shortly after the agency rejected its request to convert the leading bitcoin credit to an exchange-traded fund (ETF) on Wednesday.

“We are deeply disappointed and do not agree with it,” Grayscale Investments said in a statement posted on its website. The Securities and Exchange Commission (SEC) also rejected Bitwise’s request for a bitcoin spot ETF on the same day.

In a ruling issued on Wednesday, the SEC rejected Grayscale’s proposal to list the bitcoin spot ETF on the NYSE Arca exchange. The regulator said the proposed ETF failed to meet a standard designed to prevent fraudulent and manipulative practices and to protect investors and the public interest.

Appealing the Securities and Exchange Commission’s decision, Grayscale asked the US Court of Appeals for the District of Columbia Circuit to review the SEC’s decision, according to a petition for review Wednesday.

The SEC’s identification of potential sources of spot market manipulation includes people with a dominant position in bitcoin trying to manipulate its price, hacking of trading platforms, and the “alleged” role of tether as a stablecoin in the broader ecosystem.

The SEC added that its rejection of the product is not based on an “assessment of whether bitcoin technology, or blockchain technology in general, has utility or value as an innovation or investment.”

Grayscale initially submitted its application in October 2021, when the first Bitcoin futures-based ETF received approval to trade on the New York Stock Exchange. ProShares, Valkyrie and VanEck were the first to market.

A futures-based ETF allows an investor to buy or sell bitcoin at a predetermined price, instead of tracking the spot price of the underlying asset.

A decision on the spot-based ETF for Grayscale has been delayed as the regulator requested additional public comment. More than 11,400 letters of comment have been submitted to the Securities and Exchange Commission since November, and 99% support Grayscale, according to the asset manager.

In March, the asset manager threatened legal action against the SEC if it continued to ban the spot ETF. In June, the firm attempted to bolster its legal team by appointing former US Attorney Donald P. Ferrelli Jr. as its senior legal strategist.

“The Securities and Exchange Commission has failed to enforce consistent treatment of similar investment vehicles and is therefore acting arbitrarily and volatile in violation of the Administrative Procedures Act and the Securities Act of 1934,” Ferrelli said in a statement.

Earlier this week, Michael Sonnenchin, CEO of Grayscale, signaled optimism about the impending decision of the Securities and Exchange Commission in a letter to investors. He said the regulator’s actions in the past eight months indicate increased recognition and comfort with the underlying bitcoin market.

Now the asset manager is expected to argue that the SEC should provide fair treatment for Bitcoin-based ETFs. Bitcoin has fallen more than 37% in the past month. Blockworks Research data showed that the leading asset fell below $20,000 on Wednesday before recovering slightly to $20,074 by press time.


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  • Shalini Nagarajan

    blockworks

    Reporter

    Shalini is a crypto reporter from Bangalore, India covering market developments, regulation, market structure, and advice from institutional experts. Prior to her work at Blockworks, she worked as a markets reporter for Insider and a reporter at Reuters News. It holds some bitcoin and ether. You can access it at [email protected]

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