Judges Scrutinize SEC Over Denial of Grayscale Bitcoin ETF

Judges overseeing Grayscale’s lawsuit against the Securities and Exchange Commission (SEC) questioned the financial watchdog on Tuesday, digging into the agency’s basis for rejecting Grayscale’s application to establish a Bitcoin ETF.

The questions came during oral arguments in the US Court of Appeals for the DC Circuit, overseen by Judges Sri Srinivasan, Neomi Rao and Harry Edwards. Grayscale initiated legal action against the SEC last June, after an application to convert the Grayscale Bitcoin Trust (GBTC) into a spot market Bitcoin ETF was rejected.

A core element of the SEC’s argument, provided by SEC Senior Counsel Emily Parise, is that Grayscale’s application lacked data necessary to confidentially determine “whether fraud and manipulation in the spot market affects futures [markets] in the same way.”

But Judge Neomi Rao said it appears that the futures price of Bitcoin is a derivative of the asset’s spot price which moves together 99.9% of the time. She said the SEC has not provided evidence that Grayscale’s claims are false.

“It seems that there is quite a lot of information about how these markets work together,” adds “the commission really needs to explain […] how it understands the relationship between Bitcoin futures and the spot price of Bitcoin.”

On behalf of Grayscale, former U.S. Attorney Don Verrilli argued that the SEC’s denial of Grayscale’s application to convert GBTC into a spot market Bitcoin ETF contradicts previous decisions “giving the green light” for futures-based ETFs to trade in the U.S.

He described the SEC’s denial as “the definition of arbitrary decision-making,” and argued that Grayscale’s spot market ETF would pose the “same risk of fraud and manipulation” as currently approved Bitcoin products traded on the Chicago Mercantile Exchange (CME).

Grayscale first filed an application to convert GBTC into an ETF in 2016. According to the company’s website, it has over $14 billion worth of assets in the product.

Currently, shares of GBTC are trading at significantly less than the underlying value of Bitcoin that Grayscale holds in its trust, in part due to the structure of the product, which prevents shares from being redeemed for Bitcoin. If converted to a spot market ETF, shares of BTC would likely track the price of Bitcoin more closely as arbitrageurs trade away the difference.

As of Tuesday, shares of GBTC were trading at a 42% discount to the assets managed by Grayscale in the trust, a gap that has reached nearly 49% at its widest, according to Ycharts. However, shares climbed 7.6% to $12.68 amid Tuesday’s oral arguments.

As of now, no spot-based Bitcoin ETF has been approved in the US by the SEC, which has rejected a number of applications since the Winklevoss twins applied for a Bitcoin ETF-like trust in 2013. But Bitcoin ETFs based on futures contracts have traded in the US since ProShares’ Bitcoin Futures ETF launched on the New York Stock Exchange in October 2021.

The SEC has repeatedly cited its mandate to protect investors in the United States while rejecting spot-based Bitcoin ETF applications. When Grayscale’s application to convert GBTC into a spot market Bitcoin ETF was rejected last year, the financial watchdog said Grayscale’s application did not do enough to provide protection against “fraudulent and manipulative acts and practices.”