Grayscale vs. SEC : Spot Bitcoin ETF
Grayscale sued the SEC after their proposal for a spot bitcoin ETF was rejected — What is the key reason behind the SEC’s rejection?
On June 29th, Grayscale’s proposal to convert its Grayscale Bitcoin Trust (GBTC), the world’s largest Bitcoin fund, into a spot ETF was rejected by the US Securities and Exchange Commission (SEC). In its ruling, the SEC mentioned the agency’s failure to respond to the concerns on market manipulation, and how the application lacked a proper method of protecting the investors. However, right after the decision was made, Grayscale announced that the company is suing the SEC for denying the application.
It is almost 9 months since the first U.S. bitcoin futures ETF, ProShares Bitcoin Strategy ETF (BITO), launched in the United States. Since then, along with the addition of other bitcoin futures ETFs, some countries such as Australia, Brazil, Canada, Singapore, and recently Europe managed to approve spot bitcoin ETFs. However, the SEC has not accepted spot bitcoin ETFs until this day, and many crypto investors are disappointed with the decision. So, what is the difference between the Spot Bitcoin ETF and Bitcoin Futures ETF, and why is it that the spot ETF is keep getting rejected by the SEC?
The main difference between the two is that a spot bitcoin ETF is backed with actual bitcoin, while bitcoin futures ETF is based on bitcoin derivatives. Because a spot bitcoin ETF directly relates to the price of bitcoin, this small but important difference may lead to complicated issues:
Market Manipulation
In its recent rejections, the SEC cited that concerns about the market manipulation and fraud have not been fully answered. Bitcoin futures ETF normally invests in bitcoin derivatives that are listed on the CME or CBOE, while spot bitcoin ETF would trade based on the price of bitcoin. Thus, investors are fully exposed to market manipulation with a spot bitcoin ETF, and these are some possible sources stated by the SEC:
(1) ‘wash’ trading, (2) persons with a dominant position in bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin network and trading platforms, (4) malicious control of the bitcoin network, (5) trading based on material, non-public information, including the dissemination of false and misleading information, (6) manipulative activity involving the purported ‘stablecoin’ Tether (USDT), and (7) fraud and manipulation at bitcoin trading platforms.
Security Problems
For the bitcoin futures ETF, an agency does not have to own a bitcoin so there are no problems regarding the storage of the asset. However, a spot bitcoin ETF needs to own the bitcoin, and that is why enhancing the security for private keys and preparing countermeasures against cybersecurity becomes an important issue for spot bitcoin ETFs. As the SEC mentioned, hacking of the network and trading platforms may also become a problem considering the way the bitcoin is stored.
Since the launch of the bitcoin futures ETF last year, many people have desired for the acceptance of the spot bitcoin ETF by the SEC. The launch of a spot bitcoin ETF means that cryptocurrency will now be taken seriously by the institutions, and multiple regulatory agencies will be involved to provide a proper regulation in the United States. Along with Europe this month, many countries are continuously accepting spot bitcoin ETFs, and it is interesting to see what decision the SEC will make in the near future.
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