On June 29, the U.S. securities regulator rejected the proposal by Grayscale to list a spot Bitcoin exchange-traded fund (ETF) on the NYSE Arca exchange.

According to the SEC, the proposal did not meet standards designed to prevent fraudulent and manipulative market practices. It stated that the rejection was not based on an “assessment of whether Bitcoin or blockchain technology more generally, has utility or value as an innovation or an investment.”

The Commission identified and listed possible sources of fraud and manipulation in the spot Bitcoin market. Among them were wash trading, whale manipulation, exchange and network hacking, dissemination of misleading information, and remarkably “manipulative activity involving purported “stablecoins,” including Tether.”

Grayscale Legal Challenge

Grayscale CEO Michael Sonnenshein responded with a legal challenge on June 30. The lawsuit argues that the SEC has violated the Administrative Procedure Act and Securities Exchange Act. It stated:

In a statement regarding the action, Grayscale questioned why regulators are comfortable with ETFs that hold derivatives of a given asset, but they are not comfortable with funds that hold that same asset.

We’ve filed a lawsuit against the SEC. $GBTC

— Sonnenshein (@Sonnenshein) June 30, 2022

Donald B. Verrilli Jr., Grayscale Senior Legal Strategist and former U.S. Solicitor General, stated:

“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,”

Sonnenshein stated that the firm believes American investors overwhelmingly voiced a desire to see GBTC, Grayscale’s flagship Bitcoin fund, convert to a spot Bitcoin ETF. The GBTC fund is currently trading at a discount or negative premium of -29%, according to Ycharts.

Grayscale launched a comment campaign during the 240-day review period. It resulted in record-breaking submissions of more than 11,400 responses, with over 99% supporting the fund conversion.

“We are deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market,” he added.

The argument pivots around the premise that the SEC has already approved similar Bitcoin ETFs based on futures contracts that are still based on the underlying spot price of the asset.

Drawn Out Affair

Bloomberg’s James Seyffart tweeted a potential timeline of events following the lawsuit, which could be dragged out over the next couple of years.

Gonna retweet this because Grayscale has already filed their APA lawsuit for the $GBTC denial. Here is our *estimated* timeline of events courtesy of @NYCStein. But things are moving fast. https://t.co/ql8a43W5vs

— James Seyffart (@JSeyff) June 30, 2022

Bitcoin prices have continued their downward slide, dropping a further 1.2% on the day in a fall to $20,085 at the time of writing.