SEC decision faces criticism; Grayscale calls it ‘arbitrary and fickle’

The US stock market watchdog Securities & Exchange Commission (SEC) recently approved a number of Bitcoin futures ETFs, but a Bitcoin spot ETF from VanEck was rejected. Grayscale, which is keen to turn the Grayscale Bitcoin Trust (GBTC) into an ETF, protested the decision with a critical letter. According to Grayscale, the rejection is “arbitrary and fickle.”

What is an ETF?

Originally called trackers, they are now known as Exchange Traded Funds (ETFs). An ETF is a financial instrument that (usually) mimics the returns of a particular index.??

A provider of an ETF does this by (weighted) buying the shares that are in such an index for the lowest possible costs. So very transparent. Often the ETFs are also easy to trade. With an ETF you buy diversification at a low cost. For smaller investors, who sometimes cannot afford the most expensive shares of a certain index, this makes investing in ETFs very interesting.

In addition to ETFs that track indices, there are also ETFs that track commodities, bonds or other (financial) instruments. There are also ETFs that track baskets of stocks. This refers to thematic investing. This is a concentrated way of investing in which investments are made in a limited number of companies within a specific market segment. This form of investing has become increasingly popular in recent years.

Incidentally, investing in ETFs has grown overall in recent years, as we can see from the chart below.

To make things even more confusing, there are also Exchange Traded Products (ETPs), such as Exchange Traded Commodities (ETCs) and Exchange Traded Notes (ETNs), in addition to ETFs. They are similar to ETFs, but ETCs track the price of a particular commodity and ETNs track the price of products that are difficult to access for traditional investors.

For example, VanEck has launched a Bitcoin ETN that is traded on the Amsterdam AEX (Amsterdam Exchange Index). That ETN is 100% backed by ‘physical’ bitcoins that are kept in cold storage, according to the key investor information.

Bitcoin futures ETF vs Bitcoin spot ETF

In recent months, the US stock market watchdog: Securities and Exchange Commission (SEC) has approved three Bitcoin futures ETFs. Namely those of ProShares, Valkyrie and VanEck. The Bitcoin futures ETFs were therefore frequently in the news.

But what is a future actually? A future or forward contract is a so-called financial derivative (a derivative product). It is, in effect, an obligation to trade an underlying asset in the future at a price that has now been agreed. This can be useful to limit the risks of future price movements. For example, in the case of a beet farmer who knows how much his harvest will now be worth, but does not want to run the risk that the price of beets will fall in the meantime. By concluding a futures contract in the present, he can sell his harvest in the future for the predetermined price, thereby removing all uncertainty. Although this is a fairly simple example, in (financial) practice futures are almost exclusively used by professional investors.

Bitcoin futures ETFs similarly track the price of bitcoin through so-called futures contracts. These contracts are traded on the CME, the largest derivatives exchange in the world. Bitcoin futures ETFs therefore track the future price of bitcoin and such ETFs are now approved by the SEC.

However, VanEck’s request to launch a Bitcoin spot ETF was rejected. Unlike a Bitcoin futures ETF, a Bitcoin spot ETF does not track the future, but the current price of bitcoin on bitcoin exchanges. Bitcoin spot ETFs are 100% backed by ??????physical???? bitcoins which are ?????ǣ most likely ?????ǣ kept in cold storage. Very similar to the ETN from VanEck.

In the short term, spot and futures prices will show roughly the same movement. In the long run, however, there can be a significant difference in price. This means that the returns of Bitcoin futures ETFs may differ from the spot price of bitcoin (and future Bitcoin spot ETFs). This can be beneficial for the investor, but it can also be detrimental. For example, an adverse situation can arise when short-dated futures contracts have a lower price than longer-dated futures contracts. The market is then in contango , which can lead to negative returns for Bitcoin futures ETFs.

Letter from Grayscale

Grayscale recently announced its intention to convert its flagship – the Grayscale Bitcoin Trust (GBTC) – into a Bitcoin spot ETF. The Grayscale Bitcoin Trust (GBTC) holds 3.12% of the total amount of bitcoin at the time of writing. This makes GBTC the largest Bitcoin investment vehicle in the world

While the SEC approved futures ETFs, it recently rejected VanEck’s application for a Bitcoin spot ETF. The rejection of the VanEck Bitcoin Spot ETF was therefore reason for Grayscale to send a critical letter to the SEC in which it protests.

In the letter to the US watchdog, Grayscale’s lawyers argue that the approval of a Bitcoin futures ETF, but not a Bitcoin spot ETF, is ” arbitrary and capricious ” and thus violates the Administrative Procedure Act (APA). . This is a new argument and reflects changed market dynamics following the approval of the three Bitcoin futures ETFs.

But what do Grayscale’s lawyers actually mean by ‘ arbitrary and capricous ‘? For that we have to dive into the Administrative Procedure Act (APA). The APA, in short, requires the SEC to treat like cases alike. This means that the SEC should treat Bitcoin futures ETFs the same way it treats Bitcoin spot ETFs. This has happened in the past, both applications for Bitcoin futures ETFs and Bitcoin spot ETFs have been rejected by the SEC time and time again. According to the SEC, the potential for fraud and market manipulation was too great. With the SEC approving three Bitcoin futures ETFs in recent months, but repeatedly rejecting Bitcoin spot ETFs, the lawyers say this is ???? ??arbitrary and capricious?? ?????. In other words: random and capricious. For now, it remains to be seen how the SEC will respond to this.

More mature

The ETF landscape shows that Bitcoin is maturing as an asset class. In Europe there are already various options for investing in ??????physical??????? bitcoins, such as the VanEck ETN. With Fidelity announcing the launch of a Bitcoin spot ETF in Canada, it seems only a matter of time before a Bitcoin spot ETF is launched in the United States as well.

Want to read more about Bitcoin ETFs? Then also read our previous article about the launch of the Bitcoin futures ETFs.

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