In a pivotal move, Grayscale dispatched an open letter to the U.S. Securities and Exchange Commission (SEC) last Thursday. The essence of the communication called for the regulatory body to grant concurrent approvals to any qualifying Bitcoin spot Exchange Traded Fund (ETF) applications. The intention behind this request was to prevent the SEC from potentially favoring specific entities, thereby circumventing an arbitrary selection of ‘winners and losers.’
Grayscale Questions Coinbase’s Qualification as a Surveillance Partner
On a controversial note, according to the SEC’s pre-existing rules, Grayscale posited that Coinbase should not meet the criteria necessary for a surveillance partner to introduce such an investment product.
According to the comments in the letter, the SEC has exhibited skepticism over pricing data generated by ‘unregulated’ Bitcoin trading platforms over several years.
Grayscale referred to the SEC’s explicit refusal of the GraniteShares ETP Trust’s proposal in 2018. The trust had proposed a surveillance-sharing agreement (SSA) with Gemini‘s exchange. Still, the SEC ruled that Gemini did not meet the standards of a regulated market that could be likened to a national securities exchange.
The SEC’s Prior Rejections and the Irrelevance of BitLicense Regulation
The company drew attention to the SEC’s dismissal of Grayscale’s ETF application the previous year. The regulatory body appeared unimpressed by market data sourced from a consortium of spot Bitcoin exchanges, Coinbase included. Regulatory oversight by the New York State Department of Financial Services (NYSDFS), Financial Crimes Enforcement Network (FinCEN), and BitLicense was deemed inconsequential to whether the SEC would view the group as suitable for an SSA.
In Grayscale’s own words:
“We believe the Commission’s prior decisions have already determined that such an agreement with a venue lacking compulsory investigative authority and oversight by a comprehensive market regulator does not satisfy Section 6(b)(5) in the absence of a surveillance-sharing agreement with a market of significant size.”
Grayscale clarified that they weren’t “disputing the usefulness of information obtainable under a surveillance-sharing agreement with a spot bitcoin trading venue.”
The Influx of SSA Requests and Market Manipulation Concerns
Since the end of June, several asset managers registered with the SEC to introduce a spot Bitcoin ETF. Most of these firms identified Coinbase as their preferred partner for an SSA, a crucial requirement for each application designed to guard against market manipulation. However, no applicant has managed to satisfy the SEC’s stipulations so far.
In contrast to its more congenial rivals, Grayscale endeavored to metamorphose its Bitcoin fund into an ETF by openly challenging the SEC in a legal context. The firm staunchly supports its theory that the CME Bitcoin Futures epitomize a market size sufficient to correlate with the Bitcoin spot market and, therefore, adequate for an SSA.
Grayscale Puts The Emphasis on Investors
Suppose the SEC reverses its stance and grants approval for a Coinbase-associated ETF. In that case, Grayscale insists that the commission should give precedence to investors, particularly those affiliated with its GBTC fund.
In Grayscale’s assertion, “The Commission would be required to allow the listing exchange for the Trust (and all other spot bitcoin ETPs whose Rule 19b-4 filings were previously disapproved) to amend their Rule 19b-4 filings so that all of these spot bitcoin ETP proposals can be approved simultaneously.”
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