SEC recently rejected the VanEck ETF filed by the CBOE BZX Exchange in March that sought to track Bitcoin directly; now it’s coming under fire from all directions.
The recent backlash comes from Grayscale’s attorneys who placed the regulator on the spot demanding an explanation for its double standards while issuing Bitcoin ETFs to different applicants.
In a letter directed at the SEC by Davis Polk & Wardwell LLP, the firm argues that the approval of Bitcoin futures-based ETFs, but not Bitcoin spot-based ETFs, like $GBTC, is “arbitrary and capricious,” and therefore in violation of the Administrative Procedure Act (APA).
“The Commission has no basis for the position that investing in the derivatives market for an asset is acceptable for investors while investing in the asset itself is not. But having permitted the listing of multiple Bitcoin futures ETPs in the last several weeks, that is the policy decision the Commission would announce were it to deny NYSE Arca’s application to list BTC.” Reads the letter.
According to Craig Salm, the Legal VP at Grayscale, the retaliation was necessitated by the “unfair treatment” occasioned by the regulator by approving the first Bitcoin futures-based ETF and subsequently rejecting another spot-based ETF.
He argues that SEC’s approach to the whole issue is in contempt of the Administrative Procedure Act (APA) which requires the regulator to treat “like” situations “alike” when there is no reasonable basis for differential treatment. The SEC is thus creating an uneven playing ground by treating treat applications differently Under The Act.
According to him, the requirement to file under the Investment Company Act of 1940 (44 Act) while trivializing applications made under the Securities Act of 1933 (33 Act) under which the VanEck product was brought is misplaced and unfair.
Craig further pokes holes into the 44 Act saying that it does not address ETF’s underlying asset or exchanges but seeks to regulate the management of investment companies.
The recent rebuttal comes at an “appropriate time” even as Grayscale filed to convert the Grayscale Bitcoin Trust (GBTC) into a Bitcoin spot ETF in October amid Gensler’s heightened disapproval of direct ETF products.
Before 2021, despite the SEC having treated Bitcoin ETF applications alike, the stance changed earlier this year, with Gensler openly siding with CME futures products over direct Bitcoin ETFs stating that they offer more investor and consumer protection.
With the ball now on the SEC’s pitch, it remains unclear where the regulator with choose to stand regarding the issues raised.
According to lawyer Jake Chervinsky, both parties have a berth of alternatives. “There would only be standing for a lawsuit if the SEC decides to reject the application. They could still approve it, at least in theory! But in the event of rejection, the letter is a (very compelling) outline of a complaint that could be filed after the fact.” He says