SEC Risks Violating Admin Procedure Act by Rejecting Spot Bitcoin ETFs, Says Grayscale

The CEO of Grayscale Investments explains that the SEC could potentially violate the Administrative Procedure Act by not approving a spot bitcoin exchange-traded fund (ETF).

The SEC’s approval of a spot bitcoin ETF is “a matter of when, not if”

The US Securities and Exchange Commission (SEC) has approved not one, but two different structures of exchange traded bitcoin futures funds (ETFs). This led to optimism in the crypto industry that the securities regulator was close to approving a spot bitcoin ETF.

The first structure uses the Investment Company Act of 1940 (40 Act). Most of the bitcoin futures ETFs offered to date have been filed under this Act. The second uses the Securities Act of 1933 (33 Act). The Teucrium Bitcoin Futures ETF was approved earlier this month using the latter structure.

Grayscale Investments CEO Michael Sonnenschein explained to CNBC last week, “From a Securities and Exchange Commission perspective, the Act 40 products had several protections that the Act 33 [Securities Act of 1933] products didn’t have, but those protections never addressed the SEC’s concerns about the underlying bitcoin market and the potential for fraud or manipulation.”

He continued: “So the fact that they have now changed their thinking and approved an Act 33 product with Teucrium makes that argument invalid and speaks to the connection between bitcoin futures and the underlying bitcoin spot markets that give futures contracts value.” Sonnenschein concludes:

If the SEC cannot look at two similar issues, futures ETFs and spot ETFs, through the same lens, it is, in fact, a potential basis for violating the Administrative Procedure Act.

The Administrative Procedure Act (APA) governs the process by which federal agencies develop and issue regulations.

Last October 19, Grayscale filed an application with the SEC to convert its major bitcoin trust (GBTC) into a bitcoin ETF. GBTC is Grayscale’s largest product with nearly $26 billion in assets under management as of April 15. If approved by the SEC, GBTC will be listed on the New York Stock Exchange rather than the OTCQX.

The company is awaiting a response from the SEC in early July as to whether the filing will be approved. The CEO has hinted that filing with the SEC is a possible course of action for the company if the agency does not approve the GBTC conversion.

Commenting on whether the SEC would approve a spot bitcoin ETF, Sonnenschein emphasized:

In our view, it’s really a question of “when,” not “if.”

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