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Grayscale escalates spot Bitcoin ETF debate with lawsuit against SEC

June 30, 2022, 9:10 PM UTC
Photo of Grayscale Investments CEO Michael Sonnenshein
Led by CEO Michael Sonnenshein, Grayscale Investments is challenging the SEC's rejection of its spot Bitcoin ETF.
Jeenah Moon—Bloomberg via Getty Images

Wall Street’s top regulator still has some concerns about approving a spot Bitcoin exchange-traded fund.

Late in the evening on Wednesday, a week before the deadline to do so, the Securities and Exchange Commission rejected Grayscale Investments’ application to convert its nearly $13 billion Grayscale Bitcoin Trust into a spot ETF—an expected move albeit still one that shatters any lingering hope that the application would prove to be any different than the pack of others that have failed to live up to the regulator’s expectations.

Now, Grayscale is taking the SEC to court. Within an hour of the news about the SEC’s decision crossing the tape, CEO Michael Sonnenshein tweeted that Grayscale had filed a lawsuit against the regulator, and, surely enough, moments later, official word came down that it had indeed filed a petition for review of the SEC’s decision in the U.S. Court of Appeals for the District of Columbia Circuit on Wednesday, according to a statement. “Grayscale supports and believes in the SEC’s mandate to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation—and we are deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market,” Grayscale CEO Michael Sonnenshein said.

A spot Bitcoin ETF has long been a white whale of sorts for the crypto community, going as far back as 2013 when Tyler and Cameron Winklevoss submitted the first application to create a Bitcoin ETF in the U.S.

With the ease of a structure known for its low costs and accessibility, the product would theoretically open the floodgates of investor interest in the world’s largest cryptocurrency, or so the thinking goes. Hope began to emerge in 2021 that the SEC was warming to a spot Bitcoin ETF when it began approving ETFs that are based on a Bitcoin futures product traded at CME Group. And yet, the SEC has continued to shoot spot application after application down, often citing concerns about market manipulation and a lack of adequate surveillance around the markets trading the underlying assets—just as it did in the 86-page ruling on Grayscale’s.

The Grayscale team has been warning for months now that a lawsuit would be heading to the SEC’s doorsteps should it deny the conversion of GBTC into a spot Bitcoin ETF. The basis of the lawsuit initiated Wednesday is that the regulator violated the Administrative Procedure Act and the Securities Exchange Act of 1934 by not approving its product—filed under the Investment Company Act of 1940—but previously doing so with the Teucrium Bitcoin Futures ETF, which was filed under the Securities Act of 1933. In an April interview on CNBC, Sonnenshein said that ’40 Act products have “several protections” that ’33 Act products don’t, addressing the SEC’s concerns about the underlying Bitcoin market.

“There is a compelling, common-sense argument here, and we look forward to resolving this matter productively and expeditiously,” Grayscale senior legal strategist and former U.S. solicitor general Donald Verrilli Jr. said in a statement Wednesday.

Granted, quick is not something the courts are known for. Bloomberg Intelligence analysts, in fact, expect the lawsuit to play out over the next year to 18 months, James Seyffart tweeted Wednesday. And until then, and perhaps even after, it doesn’t seem like the SEC is close to being ready to sign off on a spot Bitcoin ETF.

What won’t SBF own? Sam Bankman-Fried may have built an empire within crypto, but the FTX CEO clearly has his eyes on all of Wall Street—not just the tiny sliver that digital assets represent. His latest possible conquest? Robinhood. On Monday, Bloomberg dropped a doozy of a report saying that FTX was holding internal discussions about whether and how to buy Robinhood. Bankman-Fried has since said there are no active M&A conversations between the two companies; however, the mere fact that discussions were being held indicates that the crypto wunderkind wants to be far more. Not that Bankman-Fried and FTX have taken their eyes off of crypto, of course. The exchange is reportedly close to buying beleaguered crypto lender BlockFi, according to CNBC.

More carnage. Genesis Trading is reportedly looking at potential losses totaling up in the “hundreds of millions” from its exposure to Three Arrows Capital and Babel Finance, according to CoinDesk.

A reintroduction. Guess who’s back? Jeff Roberts! Well, and Napster. But Jeff, more importantly. The long-time Fortune staffer who helped launched this here newsletter back in May of 2018 has officially returned to the newsroom as our first-ever crypto editor, which is to say I’m sure you’ll be hearing more from Jeff and us about what’s ahead soon enough, so stay tuned.

Declan Harty
@declanharty
Declan.harty@fortune.com

DECENTRALIZED NEWS

Credits 🚀 

Wall Street's top regulator, SEC Chair Gary Gensler, has confirmed that Bitcoin is the only crypto he can publicly call a commodity today. 

Perennial Bitcoin bull Michael Saylor's MicroStrategy has grabbed up an extra 480 Bitcoins for about $10 million. 

Jamil Nazarali, a long-time executive at Citadel Securities, has been tapped to lead the market maker's crypto venture that it's building with VirtuCharles SchwabSequoia, and others. 

Former Commodity Futures Trading Commission Chairman Chris Giancarlo has been knighted in France. 

Debits 🐻 

BlockFi is being valued at less than $500 million by investors one a year after the lending platform was considering raising funds at a valuation of $5 billion. 

Three Arrows Capital has been ordered to liquidate by a British Virgin Islands court. 

Whit Ghibbs and Jodie Fisher have resigned as CEO and CFO, respectively, of Compass Mining.

Short sellers are loading up on wagers betting against Tether, the world's largest stablecoin.

The NFT market is on the brink of seeing less than $1 billion in sales, the first time in a year. 

FOMO NO MO

The rich stay rich. While the crowds of regular folk who bought into the crypto craze over the last two years have been left reeling from the market's collapse in recent weeks, the pioneers, executives, and stalwarts of the industry are humming right along, David Yaffe-Bellany writes for The New York Times

From the article:

The combined fortunes of the 16 richest crypto billionaires exceeded $135 billion in March, Forbes estimated. As of this week, the total was about $76 billion, but most of the loss was suffered by a single billionaire, Changpeng Zhao, the chief executive of the crypto exchange Binance, whose $65 billion fortune shrank to $17.4 billion.

Cameron and Tyler Winklevoss, whose wealth stood at $4 billion apiece before the crash, were each worth $3.3 billion this week, according to Forbes. They declined to comment.

For retail investors like Ben Thompson, 33, the reality is different. Mr. Thompson, who lives in Sydney, Australia, lost about $45,000 — half his savings — in the crash. He had dabbled in crypto since 2018 and planned to use the money to open a brewery.

“A lot of people who seemed quite reputable had a lot of confidence,” Mr. Thompson said. “The smaller people get taken advantage of.”

BUBBLE-O-METER

$19 billion

While North American banks tend to have assets-to-equity ratios of about 9 to 1, Celsius Network was operating with $19 billion of assets and about $1 billion of equity a year ago, according to a report from The Wall Street Journal.

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(Some of these stories require a subscription to access. Thank you for supporting our journalism.)

IF YOU DON’T KNOW, CRYPTO

ETF. While not exclusively a crypto product, exchange-traded funds are worth getting to know—and not just for the aforementioned decision from the SEC on Grayscale's Bitcoin ETF application. Basically, an ETF is a type of fund that holds a basket of securities meant to replicate the performance of a certain index, sector, commodity, etc. Take SPY, or the SPDR S&P 500 ETF, for instance. The product, you guessed it, tracks the S&P 500. The key point to know about ETFs is that they can be traded throughout the day like a share of a stock can. Mutual funds, on the other hand, trade once a day after the market's close. 

This is the web version of The Ledger, Fortune’s weekly newsletter covering financial technology and cryptocurrency. Sign up here to receive future editions.