SEC in talks with Grayscale over ETF do-over

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The U.S. Securities and Exchange Commission (SEC) has made contact with Grayscale regarding its spot BTC exchange-traded product (ETP) application, which the SEC had initially rejected but was ordered to reconsider by a court back in August.

The news was reported by CoinDesk, which cited a person familiar with the matter. The report also quoted Grayscale’s chief legal officer, Craig Salm, who said:

“Right now we’re just laser-focused on constructively reengaging with Trading and Markets…There are still things that have to be worked through.”

It was expected that the SEC would get back in touch with Grayscale at some point. The U.S. Court of Appeals for the D.C. Circuit ruled that the SEC had failed to adequately justify its rejection of the Grayscale spot ETF, particularly in light of approvals given to ETF applications that contained BTC futures as opposed to spot BTC. The ruling was not an order that the Grayscale ETP application (or any other application) should be approved—merely that the SEC needed to better explain its reasoning.

The ruling was primarily significant because, in addition to Grayscale’s application, there are a number of other outstanding ETP proposals that are currently under review by the SEC. In practice, all of those applications live or die by the success of Grayscales: if the SEC now approves that ETP, approvals for many or all of those applications would be expected to follow.

Many have assumed that the August order is a victory for Grayscale and that the SEC can no longer justify its position on a potential BTC ETP —and it may prove to be so. However, the timing of Grayscale’s application, the SEC’s rejection, and the August order have put the SEC in an interesting dilemma. Over the past 12 months, the SEC and, in particular, its chair Gary Gensler, have come under pressure from certain politicians to approve the spot BTC applications. This effort has been reinforced by lobbying from the industry among complaints that the SEC’s caution is costing the U.S. business.

The other side of that coin is that over this same period, the digital asset industry’s non-compliant underbelly has been dramatically exposed by collapses such as FTX and 3AC. If the SEC was suspicious about market manipulation and fraud previously, those concerns have almost certainly intensified. They also cast the SEC’s earlier decision to approve a BTC futures ETP in a different light—with the benefit of knowing that FTX was brazenly stealing from customers, Binance was intentionally evading sanctions, and Grayscale’s parent company was embroiled in potentially massive market manipulation, perhaps the SEC would have been slower to sign off on a futures ETP. That is especially likely considering those futures ETPs formed the basis of the August court order to reconsider its spot ETP rejection.

The precise deadline for the SEC to issue its decision on the renewed Grayscale application is unclear. Typically, the SEC has 45 days to issue a decision. Going by the date that the court officially confirmed its August order on October 23, that would put the new deadline at December 7. The SEC has the power to extend this to 90 days. However, Grayscale noted in a recent letter to the SEC that it is arguable whether the August order reset the clock at all, in which case the SEC’s decision would be well overdue.

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