Grayscale sues SEC after rejected bid to convert Bitcoin funds into ETF

The SEC on Wednesday denied Grayscale’s application for a spot bitcoin ETF, citing a failure by the investment manager to respond to questions about market manipulation concerns.

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Grayscale, which manages the world’s largest Bitcoin fund, said it will sue the U.S. Securities and Exchange Commission after regulators rejected its bid to convert the investment vehicle into an exchange-traded fund.

The SEC on Wednesday denied Grayscale’s application for a spot bitcoin exchange-traded fund, citing a failure by the investment manager to answer questions about concerns about market manipulation.

The regulator fears that investors under the Grayscale proposal would not be adequately protected.

Grayscale applied to make its Bitcoin Trust, known as GBTC, an ETF back in October 2021, but the ruling has been delayed multiple times. Grayscale had put pressure on the watchdog to advocate, including by allowing people to quickly email to express their support.

Shortly after the SEC’s rejection, Grayscale filed a petition challenging the decision with the United States Court of Appeals for the District of Columbia Circuit. The litigation is being led by Grayscale’s chief legal officer Donald B. Verrilli Jr., a former US Attorney General, and a team of attorneys from the law firm of Davis Polk & Wardwell.

Verrilli said the SEC “fails to treat similar investment vehicles consistently and therefore acts haphazardly and capriciously in violation of the Administrative Procedures Act and the Securities Exchange Act of 1934.”

The SEC was not immediately available for comment outside of normal US business hours.

Grayscale argues that the SEC’s position is inconsistent given previous decisions to greenlight other Bitcoin-based ETFs, including those based on futures markets and one that allows investors to short – or bet against – the cryptocurrency is.

Crypto bulls had pinned their hopes on the SEC approving the first US spot bitcoin ETF, a move that would potentially open the cryptocurrency to more institutional investment.

The move to reject Grayscale’s Bitcoin ETF application is adding to a slew of negative news surrounding crypto lately. Earlier this week, embattled crypto hedge fund Three Arrows Capital collapsed and went into liquidation.

Bitcoin was trading at $20,085 late Wednesday, down 1% over the past 24 hours. Cryptocurrencies have lost a total of $2 trillion above market value since the bubble peaked in November 2021.