To better understand the SEC’s rejection, we should probably take a look at the Teucrium futures ETF approval. Now this is the bitcoin futures ETF that was filed under the same law that all the spot ETF applications have been filed under. When it was approved earlier this year, a lot of bitcoin ETF advocates said they believed it was a sign that the SEC might actually be willing to budge on the spot bitcoin applications.
The reasoning is this: SEC Chair Gary Gensler said last year that he was comfortable with futures ETFs filed under a specific law because that law enshrined certain consumer protections. The law that will govern spot bitcoin ETFs does not have the same protections.
In approving a futures ETF filed under the other law, the SEC opened the door to a spot ETF under that law, these advocates said.
(I’m keeping things relatively simple and vague – these are the 40 and 33/34 Acts, respectively, for those of you curious.)
The Teucrium approval also addressed the market manipulation concerns, saying:
“As Arca states, as a Designated Contracts Market … the CME ‘comprehensively surveils futures market conditions and price movements on a realtime and ongoing basis in order to detect and prevent price distortions, including price distortions caused by manipulative efforts.’ Thus the CME’s surveillance can reasonably be relied upon to capture the effects on the CME bitcoin futures market caused by a person attempting to manipulate the proposed futures ETP by manipulating the price of CME bitcoin futures contracts, whether that attempt is made by directly trading on the CME bitcoin futures market or indirectly by trading outside of the CME bitcoin futures market. As such, when the CME shares its surveillance information with Arca, the information would assist in detecting and deterring fraudulent or manipulative misconduct related to the non-cash assets held by the proposed ETP.”
In other words, the SEC believes that the CME can identify futures market manipulation regardless of how it’s attempted, even if the CME futures market is based on the price of bitcoin in some spot markets.
As a footnote in the Teucrium approval notes, “the CME CF BRR aggregates the trade flow of major bitcoin spot platforms during a specific calculation window into a once-a-day reference rate of the U.S. dollar price of bitcoin.”
At the same time, the SEC says it does not believe that the CME’s specific surveillance tools would be able to identify manipulation of the spot market “even if the Exchange or the Sponsor had demonstrated a link between the BRR and/or the Index and the prices of CME bitcoin futures ETFs/ETPs and/or the proposed ETP, which they have not.”
Once again, we must turn to the footnotes for the real juice. In footnote 46 of the Teucrium order, the SEC states that its reasoning in approving a futures ETF based on the CME’s ability to spot futures market manipulation “does not extend to spot bitcoin ETPs. Spot bitcoin markets are not currently ‘regulated.’”
In other words, Gensler may indeed be holding the bitcoin ETF “hostage” in an effort to bring crypto exchanges under his agency’s regulatory umbrella.
So what does all this mean for the Grayscale appeal? Meh, who knows. The company’s staffed up and prepared for this in recent weeks, bringing on former Solicitor General Don Verrilli and having an appeal letter ready to go pretty much immediately.
Christopher LaVigne, a litigation partner at the law firm Withers, told CoinDesk that “Grayscale’s in an uphill battle here,” saying the law tends to be “deferential” to the SEC.
“It’s just whether they made that decision and exercised that discretion in a way that was completely arbitrary, completely capricious and had no grounding in the law,” he said. “I think that’s a hard standard to meet and it’s intentionally a deferential standard. Otherwise, all federal agencies’ decisions would be constantly second guessed and they’d be subject to an unending amount of litigation.”
Bloomberg Intelligence’s James Seyffart pointed out that other industries do have ETFs despite a regulated spot market during a Twitter Space we held last week.
“There's equity markets that the ISG does not have surveillance sharing agreements with, that we have ETFs for,” he said. “My overarching view is more so that the the SEC and Gary Gensler are holding these applications hostage until he can get regulation of the underlying spot market.”
So the next question may be what this actually looks like – it’s hard to see Congress moving swiftly to clarify when or how a crypto trading platform must register as a national securities exchange, and the SEC itself has yet to publish any proposed rulemaking on the matter.
Cheyenne Ligon contributed reporting.
