Grayscale Calls Out SEC for Approving Leveraged Bitcoin Futures ETF While Denying Spot

Grayscale, the owner of the world’s largest bitcoin fund, has become increasingly frustrated with the U.S. Securities and Exchange Commission (SEC) after the regulator approved a leveraged bitcoin futures ETF last month.

The company has filed a lawsuit, claiming that the approval of such a product strengthens the case that the SEC’s rejection of the company’s application for a bitcoin spot ETF is ‘discriminatory’.

2X futures VS spot: Which is riskier?

In a letter to the D.C. Circuit Court of Appeals on Monday, Grayscale explained the risks associated with the 2x Bitcoin Strategy ETF (BITX), which the SEC allowed to begin trading on June 27.

The leveraged product, which raised eyebrows in the crypto industry a few weeks ago, aims to double the performance of the S&P 500 CME Bitcoin Futures Daily Roll Index each day.

– As a result, it exposes investors to an even riskier investment product than traditional products traded on the bitcoin futures exchange, which encompass risks associated with both futures and spot bitcoin markets – wrote Grayscale.

Since October 2021, the SEC has approved a series of bitcoin futures ETFs for public trading, including a short ETF last year. At that time, Grayscale’s CEO Michael Sonnhenshein viewed the approval optimistically, believing that the SEC was becoming more comfortable with bitcoin-related products.

However, just a few days later, the agency rejected Grayscale’s application to convert the Grayscale Bitcoin Trust (GBTC) into a spot ETF, claiming that the underlying bitcoin spot market contains risks of market manipulation that could harm investors.

Nevertheless, according to Grayscale, the recently approved BITX is much riskier. In the fund’s registration statement, it states that it ‘may be suitable only for knowledgeable investors’, and that such investors could ‘potentially lose the full value of their investment within a single day’.

The Case Against the SEC

The registration statement notes that the ETF invests in CME bitcoin futures contracts, whose value depends on the underlying reference asset or is derived from it.

One of Grayscale’s core legal arguments against the SEC is that CME bitcoin futures, the market with which it intends to enter into a Sharing Supervisory Agreement (SSA) for its bitcoin ETF, are directly linked to the bitcoin spot market.

Although the SEC has argued otherwise, the judges overseeing the case appeared more sympathetic to Grayscale’s arguments during oral arguments in March.

– The only way to eliminate the SEC’s unequal treatment of bitcoin-based ETPs is to allow proposed spot bitcoin ETPs like Grayscale’s to begin trading – concluded the company.

Bitcoin rose last month after asset management giant BlackRock filed for a bitcoin spot ETF, sparking optimism that it could be the first to satisfy the SEC. Unlike Grayscale, the company confirmed that it would form an SSA with the spot bitcoin exchange Coinbase.

However, uncertainty surrounding BlackRock’s filing still looms. Commercial litigator Joe Carlasare stated that the SEC cannot consider Coinbase suitable for detecting market manipulation, as it accounts for only 2% of the global bitcoin trading volume.