Last Updated: 30 June 2022
The US SEC has rejected Grayscale’s application to convert their GBTC fund into an ETF. The bitcoin price has dropped a few percentage points, but nothing significant, as if the market has already priced in the rejection.
At the time of writing, bitcoin is worth just over 19,200 euros, and with bitcoin trading open for 24 hours, it seems unlikely that this news will cause much volatility. But bitcoin remains a niche with idem ditto market cap, so nothing is out of the question.
Manipulation and fraud
Earlier, we wrote that the bitcoin market was bracing itself for 6 July, the actual deadline for the SEC to rule on Grayscale. But apparently the US regulator had time to spare to already come to a rejection. In the rejection, the SEC writes:
“This order disapproves of the proposed rule change as amended by Amendment No. 1. The Commission concludes that NYSE Arca has not met its burden under the Exchange Act and the Commission’s Rules of Practice to show that its proposal complies with the requirements of Exchange Act Section 6(b)(5), which, in pertinent part, requires that a national securities exchange’s rules be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”
In other words, the SEC says that if the New York Stock Exchange (NYSE) offers trading in Grayscale’s bitcoin ETF, they are exposing investors to manipulation and fraud. Grayscale disagrees with this decision and is going to challenge it.
Grayscale Investments has filed a lawsuit against the American regulator. With this they want to try to convert Grayscale Bitcoin Trust into a spot bitcoin exchange-traded fund.
We’ve filed a lawsuit against the SEC. $GBTC
— Sonnenshein (@Sonnenshein) June 30, 2022
In a statement, Grayscale’s CEO Michael Sonnenshein said he is “deeply disappointed by and strongly disagrees with the SEC’s decision to prevent bitcoin ETFs from entering the US market.”
“Through the ETF application review process, we believe that US investors have overwhelmingly expressed a desire to see GBTC converted into a spot bitcoin ETF, which would unlock billions of dollars of investment capital and bring the world’s largest bitcoin fund to America.”
He continued, “We will continue to use the full resources of the company to advocate for our investors and the equitable regulatory treatment of bitcoin investment vehicles.”
Bitcoin futures also lean on spot market
Just before the SEC reached its rejection decision, Sonnenheim sent a letter to the regulator. His argument was that the SEC is willing to allow a futures product but reject spot offerings, and that this is a violation of the law.
An ETF based on futures is determined on the basis of the price of those futures (a short or long contract to bet on a fall or rise in the price). But those futures are, in turn, based on the normal bitcoin price. Grayscale finds it inconsistent to refuse a spot product (ETF directly linked to real bitcoin and its value) on the grounds of insufficient protection against market manipulation, especially when an approved future product is based on the same principle.
Institutional investors and their customers lose out
If, after the court case, the SEC is forced to approve Grayscale’s ETF application, it will become the first available spot-based bitcoin ETF in the US. This means that for every share in this ETF, Grayscale has to buy real bitcoins in the normal market.
The US is the largest financial market in the world, so this could have had a huge impact on the bitcoin price. It would make it easier for institutional investors to invest in bitcoin without having to manage bitcoin for their own clients.