‘This lawsuit isn’t about bitcoin’

Grayscale Investments filed its first brief last week in its legal battle with the Securities and Exchange Commission over the agency’s refusal to let it convert its bitcoin fund into an exchange-traded fund.

In an interview Monday for Yahoo Finance’s All Markets Summit, Grayscale CEO Michael Sonnenshein says that the litigation transcends its own attempts to launch a spot bitcoin ETF.

“We really feel that this lawsuit isn’t about bitcoin,” Sonnenshein told Yahoo Finance’s editor-in-chief, Andy Serwer. “This about putting forward straightforward common sense legal arguments that really ensure that investors are protected and that the SEC is acting within their mandate.”

Grayscale first applied for a bitcoin ETF in 2016 but said it withdrew the request because the regulatory market for digital assets hadn’t sufficiently matured. The company filed again in October 2021 and received a formal rejection from the SEC that cited concerns the funds were vulnerable to market manipulation.

The company is asking a federal appeals court in Washington, DC to review the SEC’s decision, contending that the agency had applied stricter standards to spot ETFs than to futures ETS — the latter which the agency has approved.

“We’ve never seen them do this before for any other product, any other commodity that we’ve ever seen. And it applied it very, very stringently to spot bitcoin ETFs, like GBTC [Grayscale Bitcoin Trust], but very leniently to bitcoin futures ETFs,” Sonnenshein said. “So, the SEC is really acting outside of its authority under the [Securities and] Exchange Act. And that’s really one of the strongest arguments.”

Cryptocurrency remains a new industry with limited regulation. One pending piece of legislation, the Digital Commodities Consumer Protection Act of 2022, would place bitcoin under the jurisdiction of the Commodity Futures Trading Commission instead of the SEC.

The lack of proper crypto regulation is spurring digital currency companies to flee the US, Sonnenschein said. For instance, Switzerland has become the home of “Crypto Valley,” a region home to many crypto-startups due to its more business-friendly regulations.

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“You have bills passing across the floor of Congress, both sides of the aisle supporting it,” Sonnenshein said. “You have companies moving outside the US because our regulatory landscape isn’t catching up fast enough with the innovation taking place here.”

The SEC is due to file a response to Grayscale’s motion in court by Nov. 9.

Dylan Croll is a reporter and researcher at Yahoo Finance. Follow him on Twitter at @CrollonPatrol.

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