The asset manager has focused on a legal detail in a bid to bolster its application with the Securities and Exchange Commission to convert its $40bn Bitcoin Trust into an exchange traded fund, according to a letter sent to the regulator.
Grayscale’s manoeuvre comes as the SEC is deliberating over whether to give the go-ahead for US exchange traded funds to hold bitcoin, rather than derivatives linked to the cryptocurrency, for the first time. The regulator has said it will make a decision regarding Grayscale’s application in early July at the latest.
Several rivals have already been rebuked in their attempts to open similar funds and Grayscale’s gambit represents one of the crypto industry’s last hopes of launching such a product in the near future. Only three other similar crypto ETFs are in the queue for approval.
The SEC has pushed back against so-called spot crypto ETFs due to concerns that the coins trade on unregulated platforms where surveillance is difficult and manipulation a consistent problem. It has approved ETFs holding crypto futures, but those products trade on platforms that are overseen by US financial regulators.
Grayscale is betting that the SEC’s acceptance earlier this month of the Teucrium futures crypto vehicle under rules that would govern spot bitcoin ETFs could be used to bolster its case to the regulator.
In a letter submitted to the SEC this week, Grayscale said: “We believe the Teucrium order confirms the fundamental point . . . [that] when it comes to approving [exchange traded products], there is no basis for treating spot bitcoin products differently from bitcoin futures products.”
Craig Salm, Grayscale’s chief legal officer, added that following the Teucrium approval, the SEC “is effectively losing the ability to rely on the distinction” between rules governing futures ETFs and spot ETFs as a reason to reject funds linked to physical bitcoin.
The SEC declined to comment.
Some compliance professionals remain sceptical over whether Grayscale’s new legal gambit will pay off.
SEC chief Gary Gensler has argued that “largely unregulated” bitcoin markets raise fraud and manipulation concerns. He has also called on crypto platforms to register with the agency and argued that most tokens are securities and fall under the SEC’s purview.
Amy Lynch, founder and president of FrontLine Compliance, a regulatory consultancy, said that the SEC’s approval of spot bitcoin ETFs will remain difficult until matters including the funds’ pricing, valuation, custody and liquidity are standardised and more transparent.
“Gensler would have to change his position at this point,” Lynch added. “I don’t see him doing that unless there’s some lightbulb moment with these filings that answers all the questions. And I think that’s a low probability.”
But crypto players argue the evolution of the bitcoin market in recent years should assuage these concerns.
“The markets themselves have become a lot more robust since the first wave of ETFs were denied back in 2017,” said Salm, adding that crypto exchanges have boosted protections via heightened trade surveillance and use of technology similar to that in US national securities exchanges.
Matt Hougan, chief investment officer at Bitwise Asset Management — which has filed one of the outstanding applications for a fund holding bitcoin — said that while the maturation of the regulated CME spot bitcoin market was “the most important factor”, the broader crypto ecosystem had improved thanks to the launch of regulated ETFs abroad and the entry of more institutional players.
Timothy Spangler, partner at Dechert, said it was unclear what other information the SEC would require to approve spot bitcoin ETFs when other regulators such as in Australia and Canada had approved these products.
These countries “seem to be able to get comfortable” with the notion that “bitcoin is a mature enough asset to be included in a publicly traded vehicle”, he said.
“I fear that the opposition to including broader amounts of crypto in retail financial products is more philosophical than has to do with specifics,” Spangler added. “I don’t think this is a game of inches.”