Grayscale Investments — the firm behind the world's largest Bitcoin BTC/USD closed-end fund, Grayscale Bitcoin Trust GBTC — highlighted what it believes to be inconsistencies in the way the U.S. Securities and Exchange Commission (SEC) treats cryptocurrency derivatives.
What Happened: Grayscale's legal counsel Davis Polk and Wardwell wrote in a letter to the SEC that its approval for the Teucrium Bitcoin Futures Fund is inconsistent with the regulator's refusal to approve Bitcoin spot exchange-traded funds (ETFs), according to a recent The Block Crypto report.
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In the letter, Grayscale's representatives wrote that "when it comes to approving ETPs, there is no basis for treating spot Bitcoin products differently from Bitcoin futures products."
The SEC has not yet approved any Bitcoin ETFs over concerns of market manipulation, but allowed Bitcoin future-based ETFs instead since they are under the regulatory oversight of the U.S. Commodities Futures Trading Commission (CFTC). But the pricing of those products is based on the crypto spot market anyway:
"Both spot and futures-based Bitcoin products face exposure to the same underlying Bitcoin market, any fraud or manipulation in the underlying market will affect both products in the same way. [...] The existence of these risks therefore cannot serve as justification for denying approval to one product once approval for the other product has been granted."
Davis Polk and Wardwell also wrote that the approval of Teucrium's product is particularly notable since it was approved under the Securities Exchange Act of 1934 — as opposed to the Investment Act of 1940 — the same framework under which Grayscale hopes to launch its own ETF. For this reason, the "SEC can’t use the distinctions between the ‘40 Act (which is what all prior futures ETFs were approved under) anymore."
Grayscale's legal counsel believes the SEC would be arbitrary if it approves the futures-based fund and not its spot ETF under the same legal framework since "the Teucrium order confirms that 1940 Act registration is not a basis for the Commission to approve one product and reject another."
The regulator is expected to decide on the upgrade of GBTC to an ETF this summer, and the firm's CEO Michael Sonnenshein said that legal action against the SEC in case of rejection is not off the table.
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