Grayscale Investments has taken a new tack in its challenge of regulators’ refusal to allow its spot Bitcoin ETF to trade on exchanges. On Monday, Donald B. Verrilli, Jr., an attorney with Munger Tolles & Olson, sent a letter to US Court of Appeals Judge Mark Langer pointing out that the Securities and Exchange Commission (SEC) has allowed Volatility Shares’ 2X Bitcoin Strategy ETF (BITX) to trade.
Last year, Grayscale applied to convert its spot Bitcoin Trust into spot Bitcoin ETF. The SEC said no. Yet, in Grayscale’s view, BITX is riskier than the product that regulators will not approve. Is it illogical to permit the trading of an ETF that carries higher risk, while saying no to the safe one? Verrilli demanded answers.
Grayscale Investments Bitcoin ETF the Victim of a Double Standard?
The 2X Bitcoin Strategy ETF aims at doubling the performance of the S&P CME Bitcoin Futures Daily Roll Index every day, he noted. And, even more importantly, it is leveraged. The letter continued:
“It exposes investors to an even riskier investment product than the traditional bitcoin futures exchange traded products . . . which encompass risks related to both the futures and spot bitcoin markets.”
Verrilli went on to quote BITX’s June 15 registration statement. It made fairly clear that the product could incur huge losses in the hands of people who don’t know what they’re doing. It admitted that the ETF in question is suitable only for “knowledgeable investors.”
And that clearly means investors who are paying close attention to the performance of their assets, the statement added.
Even such sophisticated investors could see market turbulence wipe out the value of their investment. It could happen in a day, the registration statement adds. BITX invests in futures contracts whose value rests on that of Bitcoin, the underlying asset.
“The 2X Bitcoin Strategy ETF is therefore exposed to even more risks of the bitcoin markets than Grayscale’s proposed spot bitcoin ETF,” the letter continues.
Hence, Grayscale’s lawyer accuses the SEC of a double standard in its regulation of exchange-traded products. The regulator allows the riskier leveraged product to trade, while keeping the spot Bitcoin product off exchanges.
The remedy Grayscale seeks for this “unequal treatment” is for the regulators to reverse course. And to allow Grayscale’s product to trade.
Grayscale claims that ETFs already allowed to trade are based on CME Futures contracts and are therefore riskier than its spot Bitcoin product. Chart By Glassnode
The Industry Agrees
The release of the letter prompted a flurry of online responses. Grayscale’s tweet quickly got more than 30,000 views.
Many commentators fully agreed with Grayscale and shared its disdain for the SEC’s inconsistent stance.
Bloomberg’s Senior ETF Analyst Eric Balchunas weighed in with a tweet:
“Grayscale’s lawyer just submitted a letter today to the judge in their case about the 2x Bitcoin Futures ETF $BITX being approved,” the tweet said. “And how that just adds to their case about how the hell can that exist and not a vanilla spot ETF?”
A commentator who uses the tag Bitcoin Bombadil agreed with Grayscale and Balchunas. But he doubted they will get very far in arguing with US regulators.
Bitcoin Bombadil retweeted Balchunas’s reaction, with the comment: “Reasonable objections and arguments will not be tolerated in Clown World.”