Grayscale Displeased with SEC Approval of Another Bitcoin ETF

The firm said that the difference between leveraged bitcoin futures ETFs and spot bitcoin ETFs is not enough to discourage the latter.

Grayscale's flagship product is the Bitcoin Trust. Image: Shutterstock.

The ETF craze continues to permeate the cryptocurrency and financial space, and would-be bitcoin investors are waiting with bated breath for what they hope will be the first spot-market exchange-traded fund to be approved.

They cheered after regulators approved 2X Volatility Shares to start trading the first leveraged bitcoin futures ETF on June 23. For many observers, the move is a step in the right direction, towards the inevitable approval of ETFs in the spot market. .

However, the news was more bittersweet for another contender hoping for a chance to offer spot ETFs: Grayscale.

Donald Verilli, one of the lawyers representing Grayscale in the fight against the SEC, argued that approving the Volatility Shares ETF was contrary to its stance against any fund that involves the spot market.

Verilli wrote in a letter to the clerk of the U.S. Court of Appeals in Washington: “The fact that the Commission allowed leveraged Bitcoin futures ETPs to begin trading shows that the Commission continues to arbitrarily treat spot Bitcoin currency ETP."

For the better part of a year, the asset manager has been locked in a lawsuit against the SEC, accusing the agency of an unfair and arbitrary approval process. Grayscale sued the SEC last June after the SEC rejected its application to convert the Grayscale Bitcoin Trust (GBTC) into a spot market ETF.

The SEC argued that Grayscale's filing lacked a plan for monitoring the impact of fraud or market manipulation on spot prices. Grayscale rejected that claim, countering that futures prices themselves come from the spot market, a position the federal judge hearing the lawsuit expressed some sympathy for in a March hearing.

For Grayscale, the approval of the volatility stock ETF is just further evidence of the SEC's inconsistencies. Verilli noted in the letter that by using leverage to tap the futures market for greater returns, the fund exposes investors to greater risk than spot or traditional futures ETFs. This, he argues, should invalidate their case against Grayscale's application.

Verilli said, “While in theory the Commission could correct its discriminatory treatment of spot Bitcoin ETPs by revoking approval of all Bitcoin-based ETPs, the Commission is clearly willing to allow leveraged Bitcoin futures ETPs (a type of Bitcoin futures product) a particularly high-risk version) made it clear that it had no intention of doing so."

A representative for Volatility Shares declined to comment on Verilli's arguments.

Earlier, Justin Young, the ETF's co-founder and president, said it was Grayscale's first filing that opened the door for new entrants such as BlackRock to seek spot market products as well. He added that he believes the approval of a volatility stock ETF could facilitate the approval of one of the ETFs.

“I think it gets a lot of people’s attention, if the SEC allows leveraged bitcoin-related products, why don’t they allow spot bitcoin?” Yang said.

In a Twitter thread, Grayscale seemed to agree with this view to some extent, noting that it is not claiming that products such as Volatility Shares ETFs should not exist. Instead, the company insists it was motivated by speaking out against the SEC approval process.

“Ultimately, the excitement around these offerings supports what we have been saying all along: investors are eager to invest in BTC under the umbrella of an ETF wrapper,” it wrote.