Grayscale sues SEC after rejection of bid to turn the largest bitcoin fund into an ETF

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

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

The watchdog is concerned investors would lack sufficient protections under the Grayscale proposal.

Grayscale filed to make its Bitcoin Trust, known as GBTC, an ETF back in October 2021, but the ruling faced multiple delays. Grayscale had piled pressure on the watchdog to side with it, including by giving people a way of quickly emailing in to express their support.

Soon after the SEC’s rejection, Grayscale filed a petition challenging the decision with the U.S. Court of Appeals for District of Columbia Circuit. The litigation is being led by Grayscale’s senior legal strategist Donald B. Verrilli Jr., a former U.S. solicitor general, and a team of attorneys at law firm Davis Polk & Wardwell.

Verrilli said the SEC is “failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934.”

The SEC was not immediately available for comment outside of normal U.S. working hours.

Grayscale argues the SEC’s position is inconsistent in light of 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.

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

The move to deny Grayscale’s bitcoin ETF application adds to a slew of negative news around crypto lately. Earlier this week, embattled crypto hedge fund Three Arrows Capital collapsed into liquidation.

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