We have followed for years the saga of the many applications for a spot Bitcoin ETF that have been denied by the U.S. Securities and Exchange Commission (SEC). See here and here. This included the hope, when current SEC Chairman Gary Gensler was originally appointed, that the SEC might view things differently, but it was not meant to be, as the string of denials continued. There was one bright spot, in October 2021, when the SEC finally approved a Bitcoin ETF, but it was only for a fund based on futures contracts. See here. Those ETFs were governed by the Investment Company Act of 1940 (the 40 Act) and Chairman Gensler explained that he was more comfortable with that route because of the investor protection in the 40 Act.
In April 2022, however, the SEC approved the Teucrium ETF. It was a futures ETF, but, unlike the earlier approved funds that had been filed under the 40 Act, Teucrium had filed under the Securities Act of 1933 and the Securities Exchange Act of 1934. Since those were the statutes under which the spot ETFs had been filed, and under the general principle of treating like situations alike absent reasoned justification, there was once again hope that, perhaps, the SEC would actually approve a spot Bitcoin ETF.
Thus, all eyes were on the SEC in late June, with the approach of the final deadline on which the SEC had to make a decision with respect to pending applications from Grayscale and from Bitwise. Bitwise Asset Management had applied for a spot Bitcoin ETF. Grayscale Investment, which manages the world’s largest Bitcoin fund, Grayscale Bitcoin Trust (GBTC), sought to convert that fund into a spot Bitcoin ETF. Grayscale’s effort was probably the most aggressive to date, including a campaign that allowed people an easy method for emailing their support.
On June 30, 2022, the SEC denied both applications. The stated explanation was “same old, same old.” The SEC has still not been sufficiently persuaded that the Bitcoin market is sufficiently resistant to market manipulation. As it said in the Bitwise decision:
The Commission concludes that NYSE Arca has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), which requires, in relevant part, that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.
The Grayscale denial had similar language.
One obvious takeaway is the following. Chairman Gensler has been pushing hard for authority for the SEC to regulate the cryptocurrency market. At the same time, the recently proposed bi-partisan legislation in the Senate favors CFTC as the primary regulator of digital assets. This continued refusal to approve Bitcoin ETFs could be viewed as a means to obtaining that end of increased authority over digital assets.
But this chapter is not yet over. On the day of the denial, Grayscale appealed to the Circuit Court of Appeals for the District of Columbia. Its main arguments is grounded in the SEC’s prior approval of the ETFs based on futures markets. And the SEC approved a fund that effectively shorts the cryptocurrency. According to Grayscale’s press release, “the SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934.” It is an uphill battle because there is much discretion granted to regulatory agencies, lest every such decision be challenged in court. But, at least this time, an applicant has decided to test the Bitcoin ETF issue in court.