Inconsistent Regulatory Approvals Questioned by Grayscale Over Bitcoin ETFs

Updated: 11 July 2023

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As excitement continues to surge in both the cryptocurrency and financial industries concerning exchange traded funds (ETFs), potential Bitcoin investors are eagerly awaiting the go-ahead for the initial spot market ETF. With the first Bitcoin futures ETF, 2X Volatility Shares, being granted approval to commence trading on June 23, many view this as an encouraging stride towards inevitable spot market ETF authorization. However, not all are celebrating this progress.

Grayscale, another contender aspiring to introduce a spot ETF, experienced mixed emotions regarding the approval news. Grayscale’s legal representative, Donald Verilli, took issue with the endorsement of the Volatility Shares ETF, alleging it contradicts the SEC’s earlier stance against any fund interacting with spot markets.

The Commission’s approval for a leveraged bitcoin futures ETP to commence trading indicates an arbitrary divergence in its treatment of spot Bitcoin ETPs versus bitcoin futures ETPs.

In a letter penned to the clerk of the U.S. Court of Appeals in Washington D.C. on a Monday, Verilli expressed his concern, “The Commission’s approval for a leveraged bitcoin futures ETP to commence trading indicates an arbitrary divergence in its treatment of spot Bitcoin ETPs versus bitcoin futures ETPs.”

Grayscale has been embroiled in a lawsuit with the Securities and Exchange Commission for almost a year, alleging unfair and arbitrary practices in the approval process. The company initiated a lawsuit against the SEC in June of the previous year, following the SEC’s rejection of its application to transition its Grayscale Bitcoin Trust (GBTC) into a spot market ETF.

The SEC cited a lack of monitoring plan for potential impact on spot prices due to fraudulent activities or market manipulation in Grayscale’s application. In response, Grayscale refuted this assertion, insisting that futures prices are inherently dependent on spot markets. This argument seemed to resonate with the federal judge overseeing the case during a hearing in March.

For Grayscale, the endorsement of the Volatility Shares ETF only underscores the SEC’s inconsistent approval approach. Verilli proposed in his letter that the ETF’s utilization of leverage in futures markets to achieve increased returns exposes investors to higher risk than a spot or traditional futures ETF would, rendering the SEC’s rationale for rejecting Grayscale’s application invalid.

Today, our attorneys filed a letter with the DC Circuit highlighting the disparity between the SEC’s approval of a leveraged #bitcoin futures ETF while continuing to deny approval of spot bitcoin ETFs like $GBTC. Let’s dive deeper. 🧵/6 pic.twitter.com/z7WyGBthhT

— Grayscale (@Grayscale) July 10, 2023

Verilli asserted, “While the commission could theoretically address its unequal treatment of spot bitcoin ETPs by withdrawing its approval of all Bitcoin-based ETPs, the Commission’s seeming readiness to sanction a leveraged bitcoin futures ETP – a notably high-risk variant of a Bitcoin futures product – clearly demonstrates it has no plans to do so.” Volatility Shares representatives opted not to respond to Verilli’s comments.

SEC: An Inconsistent Regulatory Attitude

In a prior discussion, Justin Young, co-founder and president of the ETF, attributed the recent wave of spot market product applications from entities like BlackRock to Grayscale’s initial application. He expressed his belief that the approval of Volatility Shares’ ETF could pave the way for others.

Young proposed, “With the SEC’s approval of a Bitcoin-related leveraged product, it raises the question, why wouldn’t they approve spot Bitcoin?” On Twitter, Grayscale echoed Young’s sentiment, emphasizing that its objection is not towards the existence of products like Volatility Shares’ ETF. Rather, it targets the SEC’s approval process, arguing that investor eagerness for $BTC exposure within the safe framework of an ETF reinforces their longstanding assertion.