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ETF euphoria is still wafting through both the crypto and finance space, and would-be Bitcoin investors are holding their breath ahead of what they hope will be the first approved exchange traded fund for spot markets.
Their spirits were lifted after regulators gave their blessing to 2X Volatility Shares to start trading the first ETF in leveraged Bitcoin futures on June 23. For many observers, the move was a step in the right direction, toward the inevitable approval of a spot market ETF.
The news was more bittersweet, however, for another contender hoping for a chance to offer a spot ETF: Grayscale.
Donald Verilli, one of the lawyers representing Grayscale in its battle with the SEC, argued that approving the Volatility Shares ETF ran contrary to its own stance against any fund dealing with spot markets.
“The fact that the Commission has allowed a leveraged bitcoin futures ETP to begin trading demonstrates that the Commission continues to arbitrarily treat spot Bitcoin ETPs differently than bitcoin futures ETPs,” Verilli wrote in a letter to the clerk for the U.S. Court of Appeals in Washington D.C. on Monday.
For the better part of a year, the asset manager has been locked in a lawsuit against the Securities and Exchange Commission, which it accuses of being unfair and arbitrary in its approval process. Grayscale sued the SEC last June after the agency rejected its application to convert its Grayscale Bitcoin Trust (GBTC) into a spot market ETF.
The SEC argued that Grayscale's application lacked a plan to monitor any impact on spot prices that came from fraud or market manipulation. Grayscale has rejected this claim, countering that futures prices themselves are drawn from spot markets, a stance that the federal judge hearing the lawsuit showed some sympathy towards at a hearing in March.
For Grayscale, the approval of the Volatility Shares ETF was just more proof of the SEC’s inconsistency. In his letter, Verilli argued that by dealing with futures markets using leverage to achieve bigger returns, the fund was exposing investors to more risk than a spot or traditional futures ETF would. This, he argues, should invalidate their rationale opposing Grayscale’s filing.
"While the commission could theoretically correct its discriminatory treatment of spot bitcoin ETPs by rescinding its approval of all Bitcoin-based ETPs, the Commission's apparent willingness to permit even a leveraged bitcoin futures ETP—a particularly high-risk version of a Bitcoin futures product—makes clear [it] has no intention of doing so," said Verilli.
Representatives from Volatility Shares declined to comment on Verilli’s arguments.
In an earlier interview with Decrypt, the ETF’s co-founder and president Justin Young said that it was Grayscale’s initial application that cracked the door open to recent entrants like BlackRock to also seek a spot market product. He added that it was his belief that approval of the Volatility Shares’ ETF could facilitate approval for one.
"I think it brings to a lot of people's attention the thought that if the SEC has let a leveraged Bitcoin linked product through, why on Earth wouldn't they allow spot Bitcoin through?" Young said.
In a Twitter thread, Grayscale appeared to be in some agreement with this view, noting that it is not claiming that products like Volatility Shares' ETF should not exist. The firm insisted instead that it was motivated to speak out against the SEC's approval process.
"Ultimately, excitement for these products backs up what we’ve been saying all along: that investors are eager for $BTC exposure with the protections of the ETF wrapper," it wrote.