Grayscale launches lawsuit against SEC over denied listing

Grayscale has launched a lawsuit against the US Securities and Exchange Commission after the US regulator denied the group’s bid to convert the world’s largest crypto investment vehicle into a fund listed on Wall Street exchanges.

The company on Wednesday filed a petition for review with the appeals court in the District of Columbia to challenge the SEC’s rejection of its application to convert its $40bn Bitcoin Trust into an exchange traded fund.

In a filing, the SEC argued that NYSE Arca — which wanted to list Grayscale’s product — failed to meet requirements “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest”.

The rejection came as the SEC debates whether to allow US ETFs to hold bitcoin, rather than derivatives linked to the digital token, for the first time.

The regulator — which under chair Gary Gensler has heightened scrutiny of the crypto sector — had pushed back against this type of product based on concerns that the tokens trade on unregulated exchanges with surveillance and manipulation risks.

The SEC has approved ETFs holding crypto futures, but those instruments trade on regulated platforms.

Michael Sonnenshein, Grayscale’s chief executive, said in a statement that he was “deeply disappointed” and “vehemently” disagreed with the SEC’s decision. He added that Grayscale would continue to “leverage the full resources of the firm to advocate for our investors and the equitable regulatory treatment of bitcoin investment vehicles.”

The SEC did not immediately respond to requests for comment.

The regulator’s decision dealt a blow to crypto players pinning hopes on Grayscale to launch a spot bitcoin ETF. Previous applications for similar instruments filed by several rivals were unsuccessful.

Donald Verrilli, Grayscale’s senior legal strategist, said in a statement that the SEC was “failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously”.

Grayscale originally filed an application to convert its Bitcoin Trust in October and made a renewed push this year after the SEC accepted the Teucrium futures crypto instrument under rules that would govern spot bitcoin ETFs.

Craig Salm, Grayscale’s chief legal officer, told the Financial Times in April that following the Teucrium approval, the SEC was “effectively losing the ability to rely on the distinction” between rules governing futures ETFs and spot ETFs as a reason to reject funds linked to bitcoin.