Grayscale Prepares Itself for SEC Ruling on Spot ETF

Grayscale CEO Michael Sonnenshein has told investors he is ready for a spot bitcoin exchange-traded fund (ETF) regardless of what the Securities and Exchange Commission (SEC) says.

Grayscale’s application to convert its Grayscale Bitcoin Trust to a spot ETF is nearing the end of a 240-day waiting period on the SEC’s desk, where it has languished since Nov 2021. 

With this in mind, the CEO reflected on the progress made toward offering American investors a familiar vehicle to trade bitcoin, including mass-marketing campaigns, a microsite dedicated to educating and giving voice to ordinary citizens, and meetings with respected academics. 

Almost 11,500 entities, including investors and trade associations, submitted letters to the SEC on behalf of Grayscale in support of a spot bitcoin ETF.

Highlighting the encouraging progress on regulatory approvals for bitcoin futures ETFs under the Securities Act of 1933 and the Investment Company Act of 1940, and most recently the approval of a Short Bitcoin Futures ETF by ProShares, Sonnenshein said that, in his view, the bitcoin market is maturing, strengthening the argument for a spot ETF.

Grayscale leaving no stone unturned

The company argued earlier that approving a bitcoin futures ETF from ETF provider Teucrium under the 1933 Act flies in the face of SEC Chair Gary Gensler’s claim that the 1940 Act provides better investor protections and is a suitable framework. 

Why deny Grayscale’s application based on an act with greater protections, argued Nate Geraci of the ETF Store earlier this year, which does not make sense.

Given Grayscale’s experience with the SEC, this time around, it is pulling out all the stops. Should the spot ETF be approved, Sonnenshein says that the company, together with strategic partners BNY Mellon and EY, is ready to convert the Bitcoin Trust to a spot ETF.

Should the SEC deny the spot ETF application, the company’s battalion of lawyers, including Davis Polk & Wardwell attorneys and former Obama administration solicitor general Donald B. Verrilli have crafted arguments supporting the conversion of the ETF.

Crypto market performance unlikely to help Grayscale

The SEC has argued against spot ETFs, saying that the underlying market is open to manipulation. It rejected a filing from Ark 21Shares for a bitcoin spot ETF filing in April and one from VanEck in Nov last year. 

And with the recent shake-ups the crypto market has experienced in the previous month and a half, with the collapse of the TerraUSD stablecoin, a prominent hedge fund failing to meet lender margin calls, and FTX CEO Sam Bankman-Fried tossing a lifeline to crypto lender BlockFi and crypto broker Voyager Digital, the volatility of cryptocurrencies has come to the fore, which has not helped Grayscale’s case.

Amy Lynch, president of a regulatory consultancy, FrontLine Compliance, said that until the funds’ pricing, valuation, custody, and liquidity are more transparent, SEC Chairman Gensler is unlikely to change his mind.