GrayScale Enters the Bitcoin ETF Landscape By Sending A Letter to the SEC

Fri Jul 28 2023

Grayscale's letter advises the SEC to alter its course and approve spot Bitcoin ETFs based on surveillance-sharing agreements with various spot Bitcoin trading venues.

Grayscale, a prominent player in the cryptocurrency space, has sent a compelling letter to the Securities and Exchange Commission (SEC), requesting a thorough reevaluation of the approval process for spot Bitcoin Exchange-Traded Funds (ETFs) or Exchange-Traded Products (ETPs). Authored by Joseph A. Hall of Davis Polk & Wardwell LLP, the letter emphasizes that the SEC should not solely rely on surveillance-sharing agreements with a single entity like Coinbase, Inc., but rather assess proposals based on the Exchange Act and the Section 6(b)(5) standard. This article delves into Grayscale’s role in the cryptocurrency industry, its significance in the market, and the key points of the letter sent to the SEC.

Grayscale facilitates institutional and individual investment in cryptocurrencies. The company’s primary focus lies in providing accessible and secure investment vehicles for cryptocurrencies, particularly Bitcoin and other leading altcoins. Established in 2013, Grayscale has become one of the world’s largest digital currency asset managers, with a diverse range of cryptocurrency-based investment products.

Grayscale plays a crucial role in bridging the gap between traditional finance and the burgeoning cryptocurrency market. By offering investment products like the Grayscale Bitcoin Trust (GBTC), the firm allows investors to gain exposure to the price movements of cryptocurrencies without directly holding the underlying assets. This approach appeals to institutional investors who seek regulated investment options and are restricted from investing directly in digital currencies.

The firm’s trust structure, where investors purchase shares that represent a specific amount of cryptocurrency, provides a seamless and regulated avenue for entering the crypto space. Grayscale’s products have gained significant popularity due to their regulatory compliance and stringent security measures, providing investors with confidence in the volatile cryptocurrency market.

The Letter Addressed to the SEC

The letter, sent by Davis Polk & Wardwell LLP on behalf of Grayscale Investments, LLC, urges the SEC to reevaluate its approach to approving spot Bitcoin ETFs or ETPs. The crux of the argument is that the SEC should not rely solely on surveillance-sharing agreements with one company, Coinbase, Inc., when considering proposed rule changes for spot Bitcoin ETFs. Instead, the letter emphasizes that the SEC should apply a standardized evaluation based on the requirements of the Exchange Act and the Section 6(b)(5) standard for all proposals.

The document also addresses the possibility of utilizing surveillance-sharing agreements with other spot Bitcoin trading venues, should an agreement with a regulated market of significant size (like the CME Bitcoin futures market) not be available. The argument put forth suggests that relying solely on one entity for surveillance may not adequately represent the broader market, potentially hindering fair market evaluation.

The Conclusion and Call for Fair and Orderly Approval

In conclusion, the letter advises the SEC to alter its course and approve spot Bitcoin ETPs based on surveillance-sharing agreements with various spot Bitcoin trading venues. The plea emphasizes that such approval should be carried out fairly and systematically, affording all listing exchanges of the Trust and other spot Bitcoin ETPs whose Rule 19b-4 filings were previously disapproved the opportunity to amend their filings before any approval decision is made.

This letter marks a critical milestone in the ongoing debate over the approval of Bitcoin ETFs and highlights Grayscale Investments’ commitment to fostering a fair and transparent regulatory environment for the cryptocurrency market. As the SEC considers this request, the future of spot Bitcoin ETPs remains uncertain, but Grayscale’s effort underscores the significance of having a comprehensive and well-considered approach to the regulation of digital assets in the evolving financial landscape.

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