Grayscale, Bitwise ETF Applications Rejected By SEC; Grayscale Sues

SEC and Grayscale ETF

Late yesterday, the Securities and Exchange Commission (SEC) announced its rejection of applications by both Grayscale (see entire PDF) and Bitwise (view that one) to create first-of-its-kind Bitcoin Spot ETF (Exchange-Traded Fund) investment vehicles.

In declining the Grayscale application, which would have converted the Grayscale Bitcoin Trust (GBTC) to an ETF, the SEC said the company did not show it could overcome the Commission’s concerns around the potential for fraud and market manipulation:

“Because, here, NYSE Arca is seeking to list a spot bitcoin ETP (i.e. Grayscale’s spot Bitcoin ETF) that relies on the CME as the purported ‘significant’ regulated market with which it has a comprehensive surveillance sharing agreement, the assets held by the proposed ETP would not be traded on the CME. Thus there is reason to question whether a surveillance-sharing agreement with the CME would, in fact, assist in detecting and deterring fraudulent and manipulative misconduct affecting the price of the spot bitcoin held by the proposed ETP. The Exchange could have overcome this concern by demonstrating that there is a reasonable likelihood that a person attempting to manipulate the proposed ETP would have to trade on the CME in order to manipulate the ETP because such demonstration would help establish that the Exchange’s surveillance-sharing agreement with the CME would have the intended effect of aiding in the detection and deterrence of fraudulent and manipulative misconduct related to the spot bitcoin held by the proposed ETP. As discussed and explained above, the Commission finds that NYSE Arca has not made such demonstration.”

For Bitwise and its ETP Trust, the SEC rejected its application on similar terms:

“NYSE Arca has not provided sufficient information to establish both prongs of the ‘market of significant size’ determination, and thus the Commission cannot conclude that the CME bitcoin futures market is a ‘market of significant size’ related to spot bitcoin such that NYSE Arca would be able to rely on a surveillance-sharing agreement with the CME to provide sufficient protection against fraudulent and manipulative acts and practices. Therefore, NYSE Arca has not met its burden of demonstrating that the proposal is consistent with Exchange Act Section 6(b)(5),135 and, accordingly, the Commission must disapprove the proposal.”

What’s next

In short, a lawsuit.

Although Bitwise has yet to comment, a statement released last night by Grayscale announced its intention to sue the SEC. Grayscale CEO Michael Sonnenshein added, “… We are deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market.”

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