As the appeal to the DC Circuit continues over the transformation of Grayscale Bitcoin Trust (GBTC) into a spot bitcoin exchange-traded fund (ETF), Davis Polk, Grayscale’s legal team, has submitted a comment letter to the Securities and Exchange Commission (SEC) regarding the pending 19b-4 filing of GBTC and seven other spot bitcoin ETF filings. These filings propose novel surveillance-sharing agreements (SSAs).
These SSAs, one of which is being planned between the listing exchange and Coinbase, are seen as a pathway to secure additional data about spot Bitcoin trades on Coinbase when necessary for the exchange’s surveillance program. The intention is to provide additional support in the fight against potential fraudulent activity.
However, the SEC, historically skeptical about unregulated Bitcoin trading venues, has previously questioned the relevance of such data. In 2018, it explicitly refuted the idea that an SSA with a spot bitcoin trading venue could offer an alternative for meeting the demands of Section 6(b)(5). Specifically, it didn’t see these venues as comparable to a national securities exchange or the futures exchanges that have been associated with previously approved commodity-trust ETFs.
Even last year, in 2022, the SEC demonstrated its ongoing doubts regarding the value of data from spot bitcoin trading venues, including Coinbase. This despite these venues’ adherence to programs such as the BitLicense program run by the New York State Department of Financial Services, as well as their implementation of various measures designed to curtail potential manipulative or fraudulent trading activity.
According to the SEC, oversight by the Financial Crimes Enforcement Network (FinCEN) and the New York State Department of Financial Services, including anti-money laundering (AML) and know-your-customer (KYC) or BitLicense regulations, do not replace the need for a surveillance-sharing agreement between the Exchange and a regulated market of significant size related to the underlying bitcoin assets.
The critical point to note is that the SEC’s past bitcoin futures ETF approval orders make it clear that a surveillance-sharing agreement with a regulated market of significant size alone is enough to satisfy Section 6(b)(5). Consequently, these orders do not require the listing exchange to enter into an agreement with a spot bitcoin trading venue.
This history underscores the challenge faced by spot bitcoin ETFs. They may be deemed to be unfairly discriminated against if they have to shoulder additional requirements, which would be contrary to Section 6(b)(5) and the Administrative Procedure Act.
Grayscale, through its comment letter, continues to make a case for why the SEC should approve all spot bitcoin ETF applications. It argues that the SEC is already positioned to do so, given its previous approval of bitcoin futures ETFs. Notably, it emphasizes the high correlation between Bitcoin’s spot and futures markets, arguing that surveillance of the CME bitcoin futures market should suffice in protecting against possible fraud or manipulation in the underlying spot bitcoin market.
Moreover, Grayscale contends that the SEC’s actions related to bitcoin ETFs should be made in a fair and orderly manner. Whether through a court mandate or an evolution of its position, if the SEC decides to approve a spot bitcoin ETF, it must do so in a way that is equitable to all investors and issuers.
Grayscale advocates for a simultaneous approval of all spot bitcoin ETF applications for the benefit of Bitcoin, the market, and investors, pointing out that nearly a million investors across all 50 states who own GBTC stand to gain from GBTC’s conversion to an ETF.
It remains to be seen how the SEC will respond, and whether Grayscale’s arguments will sway it towards a more favorable view of spot bitcoin ETFs. It is clear, however, that the conversation around cryptocurrency regulation and investor access continues to evolve in the U.S. market.
