Bitcoin ETF: Grayscale Pushes Back Against SEC’s “Capricious” Behavior, Fidelity Bypass US to Launch Spot ETF in Canada

Grayscale sent a letter to SEC regarding its repeated rejection of physically-backed Bitcoin ETFs, which it says violates the Administrative Procedure Act (APA).

Fidelity is not waiting around for the Securities and Exchange Commission (SEC) to approve a physically-backed ETF in the US and is launching a Bitcoin spot ETF in Canada this week.

One of the largest asset managers in the US with over $4 trillion in assets under management (AUM) will be directly obtaining physical Bitcoin for its actively managed Fidelity Advantage Bitcoin ETF (FBTC).

“This should be embarrassing for the SEC that one of America's biggest, most storied names in investing is forced to go up North to serve its clients. But it prob won't matter,” commented Eric Balchunas, Senior ETF Analyst at Bloomberg.

Amidst the recent Bitcoin spot ETF rejection by the SEC, the world’s largest digital asset manager, Grayscale pushed back on the regulator's arguments regarding the same.

Grayscale, which filed to convert its bitcoin trust (GBTC) to an ETF in October, sent a letter to the agency late on Monday, saying that the SEC’s repeated rejections could violate the Administrative Procedure Act (APA), which covers the decision-making process of federal agencies.

The asset manager claims the agency’s decision not to approve Bitcoin spot ETFs have been “arbitrary and capricious” since the SEC has approved futures-based ETFs. The letter stated,

“Bitcoin futures ETPs registered under the 1940 Act and spot Bitcoin ETPs that are not required or eligible to be so registered are the same in all relevant respects, but based on the analysis in the November 12, 2021 disapproval order, the Commission is treating them differently.”

According to Grayscale, while the Commission has cited investor protections under the 1940 Act as justification for its “disparate treatment,” it is not relevant to the concern repeatedly invoked to deny Rule 19b-4 applications for spot Bitcoin ETPs like BTC: market manipulation and fraud in the underlying Bitcoin market.

“As it stands, the Bitcoin ETF landscape is unfair and discriminatory against GBTC shareholders and all of the other U.S. investors looking for an accessible and efficient way to gain their Bitcoin exposure,” Grayscale's VP of legal, Craig Salm, said in a post on Grayscale's website.

“Fortunately, the Administrative Procedure Act (APA) exists to address situations just like this one — to govern the process by which federal agencies develop and issue regulations, ultimately to protect the American investor.”

The agency is yet to respond to the letter.

In October, the first Bitcoin futures ETF was approved, and since then, two other funds have started trading. Due to the advantage of the first move, ProShares (BITO) has amassed $1.4 billion compared to about $60 million by Valkyrie’s BTF and $10 million by VanEck’s XBTF.

Grayscale meanwhile has $37 billion in its Bitcoin Trust (GBTC), which has been trading at a discount, ever since March this year, at 13.9%.

Recently, the $1.6tn asset manager Invesco also launched Bitcoin-spot ETP in Europe after aborting the decision to launch a future ETF in part due to regulatory constraints making it too costly for investors.

“We thought that CME futures were going to be a very effective element of the portfolio. We never thought they would be effective when they would be 100% of the product,” said Anna Paglia, global head of ETFs at Invesco.

Their ideal portfolio was instead a mix of futures, swaps, physical bitcoin, ETFs, and private funds investing in the bitcoin industry, to help protect investors in the event of a liquidity crunch.

Bitwise Asset Management, which manages $1.7 bln in crypto assets, was among others to withdraw a filing for a futures-based ETF.

CIO Matt Hougan said BITO’s success had already “overwhelmed” the middlemen, futures commission merchants, who, in response, have raised their prices.

“Our view was that a futures-based ETF was going to be imperfect.”

“When we filed we thought that it would be worth it, but costs built on costs — the contango, the commission merchants, added costs to work through a Cayman subsidiary — so that we ultimately decided it wasn’t in the interests of long-term investors.”

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