SEC deems Grayscale GBTC conversion denial to a spot Bitcoin ETF ‘well-founded’

The US Securities and Exchange Commission (SEC) has filed the first response in Grayscale Investments’ suit concerning the rejection of the conversion request for the trust GBTC into a spot bitcoin-ETF. The regulator described the decision as ‘well-founded and reasonably explained’.

“Earlier, the Commission approved ETFs based on CME futures contracts registered with the CFTC; thus, the underlying assets of these funds are subject to strict oversight. The spot bitcoin market, by contrast, is fragmented and unregulated. The applicant did not present compelling arguments in favour of the thesis that CME’s oversight of futures trading would be sufficient to detect and deter fraud and manipulation in the spot market,” the statement said.

In the regulator’s view, there is no contradiction in its actions, since spot and futures ETFs are ‘fundamentally different products’.

Grayscale Investments filed the application to convert the GBTC trust into an exchange-traded fund in October 2021. In the same month, the SEC approved the first U.S. ETF based on Bitcoin futures — the Bitcoin Strategy ETF from ProShares.

The Commission rejected Grayscale Investments’ application, stating that the decision did not meet the product requirements for ‘prevention of fraudulent and manipulative acts […], as well as protecting investors and the public interest’.

In June 2022 the company filed a lawsuit against the regulator, alleging that the SEC ‘acts arbitrarily and capriciously’, violating the Administrative Procedure Act.