As part of our filing to uplist our flagship product, Grayscale® Bitcoin Trust (OTCQX: GBTC), into a Bitcoin Spot ETF, there’s a standard 240-day open review period. To date, over 3,100 comments have been submitted to the Securities and Exchange Commission for consideration as part of this process. In this blog, we’re going to focus on just two of them.
In November, our lawyers at Davis Polk submitted a comment letter to the SEC, outlining a new argument in support of a Bitcoin ETF. At the time, we detailed the contents of that letter in a blog post. Since then, a series of regulatory decisions have given us the opportunity to strengthen our case. This week, Davis Polk submitted a new comment detailing why. Our Chief Legal Officer Craig Salm returns to explain this newer argument, and what this means for investors:
Why did Davis Polk update their argument?
To level set, back in November our attorneys at Davis Polk filed a letter with the SEC arguing that the approval of Bitcoin futures ETFs, but not Bitcoin spot ETFs, like what GBTC would be, would be “arbitrary and capricious” and “unfair discrimination” in violation of the Administrative Procedure Act (APA) and Securities Exchange Act of 1934. The APA is essentially the regulation that governs how regulators govern and requires in part, that the SEC treat like situations alike. In the context of Bitcoin ETFs, that means both futures and spot-based ETFs. The Exchange Act, or ‘34 Act, is what governs the ability of Bitcoin ETFs to be listed on national securities exchanges like NYSE Arca.
Back then, this first letter was noteworthy because it was a new argument in the context of Bitcoin ETFs — reflective of the new market dynamics following the approval of several Bitcoin futures-based ETFs, and subsequent rejection of another spot-based ETF application. In other words, the SEC was no longer treating like situations alike.
The Davis Polk letter now reflects yet another new argument that wasn’t possible until the approval of the first Bitcoin futures ETF registered under the same regulation that all Bitcoin spot ETFs like GBTC would be registered.
Administrative Procedure Act (APA) - Regulates regulators. It establishes a broad range of standards for how federal regulators like the SEC govern and requires in part that they treat like situations alike.
Securities Exchange Act of 1934 (‘34 Act) - Regulates securities listed on national exchanges like NYSE Arca. This includes more traditional securities like stocks and bonds, in addition to newer innovations like ETFs that hold commodities like Bitcoin.
Investment Company Act of 1940 (‘40 Act) - Regulates companies that themselves “engage primarily in investing, reinvesting, and trading in securities,” such as mutual funds and many futures ETFs. Bitcoin is not considered a security under current U.S. law.
What is the new argument?
Prior to April 6, the SEC had only approved Bitcoin futures ETFs registered under the Investment Company Act of 1940, or ‘40 Act. This included those offered by Proshares (BITO), VanEck (XBTF) and Valkeryie (BTF). However the SEC denied all Bitcoin spot ETFs that would be registered under the ‘34 Act. This included those that would be offered by Fidelity, WisdomTree, Ark/Coinshares, NYDIG and GlobalX. *Note these ETFs would also have their shares registered under the Securities Act of 1933.
The SEC’s reasoning for treating these investment products differently was due to distinctions between the ’40 Act and ’34 Act. But as we’ve explained in our previous A New Argument for a Bitcoin ETF, those are distinctions without a difference in the context of Bitcoin ETFs.
Does this impact the Bitcoin ETF uplisting progress?
For one, the SEC can no longer rely on the protections or procedural differences of the ‘40 Act as a reason to treat Bitcoin futures and Bitcoin spot ETFs differently.
First, the Teucrim order confirms that 1940 Act registration is not a basis for the Commission to approve one product and reject another. As we discussed in our November 2021 letter, the Commission has never explained why 1940 Act registration should matter for the purposes of approving a Bitcoin ETP under Exchange Act § 6(b)(5). The Teucrium order makes clear that it does not.Davis Polk & Wardwell LLP
You can read the full letter here.
Most importantly, the SEC has paved the way to ultimately approve spot Bitcoin ETFs like GBTC. First we saw the approval of the first Bitcoin futures ETF regulated under the ‘40 Act. Second, we saw the first Bitcoin futures ETF regulated under the ‘34 Act and ‘33 Act. The next natural step is to see the first Bitcoin spot ETF regulated under the ‘34 Act and ‘33 Act, like GBTC. We believe that to do otherwise would be “arbitrary and capricious” and “unfair discrimination” in violation of the APA and ‘34 Act.
As it stands, the Bitcoin ETF landscape is unfair and discriminatory against GBTC shareholders and all of the other U.S. investors looking for an accessible and efficient way to gain their Bitcoin exposure. We look forward to engaging further with the SEC on this matter.