The SEC rejected Grayscale’s application in June 2022 on the basis that a spot ETF carries a greater risk of fraud and does not sufficiently protect investors. It added that Grayscale did not show an adequate plan to prevent fraud and protect investors in its application.
Grayscale immediately sued the SEC and appealed its decision in court and has been embroiled in a legal battle ever since.
Grayscale’s appeal is constructed around the argument that a spot ETF is no different from a futures ETF — which the SEC has previously approved — and thus has no grounds to reject its application.
The SEC, on the other hand, claims that the two are different because futures contracts are traded on public exchanges — like the Chicago Mercantile Exchange — supervised by federal regulators. It added that the CME does extensive surveillance of trading on the exchange and has various tools in place to detect fraud and price manipulation.
Grayscale claims that both spot and futures ETFs rely on Bitcoin’s price and thus carry the same levels of risk regardless of where they are traded.
Outcome expected in months
Federal appellate court judges will listen to the arguments starting March 7 and are expected to reach a final decision in the coming months.
Bloomberg analysts believe there is a less than 50% chance of judges overturning the SEC’s ruling as CME surveillance is sufficient for fraud and manipulation detection when it comes to futures-based ETFs. However, it is unclear whether such surveillance will work for spot ETFs in the same way.
Meanwhile, Grayscale’s lead counsel Don Verrilli said the SEC is taking similar things and treating them differently which strengthens the company’s argument, and added that he is “confident” the appeal will be successful. He said:
“The most basic way in which an agency can act in an arbitrary and capricious manner is to take like cases, like situations, and treat them differently. And, essentially, that’s what we have here.”
Verrilli is a seasoned lawyer and has successfully argued high-profile cases in the Supreme Court in the past.
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