Grayscale: SEC Acting Unfairly by Approving Leveraged Bitcoin ETF

The firm said it’s another example of the agency being discriminatory in how it treats different bitcoin ETFs.

The launch of a risky 2x leveraged bitcoin futures ETF is further evidence that the SEC is treating spot bitcoin ETFs unfairly, according to a letter submitted Monday by Grayscale to the U.S. Court of Appeals for the District of Columbia Circuit.  

Donald B. Verrilli Jr., lead counsel in Grayscale’s appeal of the SEC’s decision to deny its application to convert the Grayscale Bitcoin Trust (GBTC) into a spot bitcoin ETF, argues in that letter that the fact that the SEC allowed the Volatility Shares 2x Bitcoin Strategy ETF (BITX) while denying spot bitcoin ETFs from trading demonstrates that “the Commission continues to arbitrarily treat spot bitcoin ETPs differently than bitcoin futures ETPs.” 
 
BITX, which has $15 million in assets under management only two weeks after launching, is much more volatile and riskier than standard bitcoin futures ETFs like the ProShares Bitcoin Strategy ETF (BITO).  
 
And similarly, in some ways it’s much riskier than a hypothetical spot bitcoin ETF.  

That’s why a lot of people have been scratching their heads. How can BITX be OK for investors to buy, while a spot bitcoin ETF is not? How does that jibe with the SEC’s mandate to protect investors? 

That’s certainly a legitimate question and one that the SEC should address.  

Different Issues  

To be fair, though, the SEC has explained how it could reject spot bitcoin ETFs, even if said ETFs can offer benefits to investors. Here’s what the agency said when it blocked GBTC’s conversion into an ETF last year:

“Under Section 6(b)(5) [of the Exchange Act], the rules of a national securities exchange [must] be designed to prevent fraudulent and manipulative acts and practices—and [the SEC] must disapprove the filing if it does not make such a finding.” 
 
“Thus, even if a proposed rule change purports to protect investors from a particular type of investment risk … the proposed rule change may still fail to meet the requirements under the Exchange Act,” the SEC added.  

In other words, the riskiness of a spot bitcoin ETF versus a leveraged bitcoin futures ETF based on price performance isn’t the lens that the SEC is looking at this from. It’s looking at a list of requirements under the Exchange Act, interpreting them and deciding whether spot bitcoin ETFs meet those requirements. 

You can disagree with the SEC’s interpretation of the requirements and how it applies them to spot bitcoin ETFs—and many people do disagree with the SEC in that regard—but that’s separate from the issue of what type of bitcoin ETF is more volatile.  

You can also make the case, as Grayscale has done, that the SEC has failed 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.” 
 
The SEC considers the bitcoin futures market to be distinct from the spot bitcoin market, but there is a reasonable argument to be made that the SEC is wrong about that. 

But again, that’s a different issue than what type of bitcoin ETF might go up or down more.  

Contact Sumit Roy at [email protected]