On March 7, a group of judges heard oral arguments in the Grayscale Investments lawsuit against the Securities and Exchange Commission (SEC). Grayscale is contesting the SEC’s decision to reject its proposal to establish an exchange-traded fund for Bitcoin spot. The SEC released its directive on July 6.
Prior to Chief Judge Sri Srinivasan, Judges Neomi Rao and Harry Edwards of the District of Columbia Circuit Court of Appeals, Grayscale was represented by former attorney general Donald Verrilli Jr., and the SEC was represented by senior counsel Emily Parise. Verrilli started by stating:
“The key issue with the order is that it contradicts past SEC orders giving the go-ahead to Bitcoin futures ETPs that represent a similar risk of fraud and manipulation and have set up a similar CME [Chicago Mercantile Exchange] surveillance mechanism to protect against those risks.”
Teucrium, ProShares, VanEck, and Valkyrie have investment products authorized by the SEC that are connected to BTC futures.
The spot markets that underlie the asset in the proposed ETF are “fragmented and unregulated,” in contrast to the CME, which is governed by the Commodity Futures Trading Commission, according to Parise, who tried to claim that the offerings are not similar with the Grayscale proposal also because surveillance mechanisms differ between them (CFTC).
The claim that the Bitcoin spot and futures markets move in lockstep 99.9% of the time was also rejected by Parise, who noted that it is uncertain whether the futures market leads the spot market when it is subject to fraud and manipulation, or vice versa.
The suggested Grayscale product would use CME surveillance as a stand-in for spot market surveillance. Parise continued, “In addition, the 99.9% correlation is based on “once-a-day” futures values, independent of intraday prices.
Since Parise received more inquiries from the judges than Verrilli did, the crypto community assumed that the judges were siding with Grayscale. They demanded clarification, for instance, on how Teucrium’s product varies from Grayscale’s that also received SEC approval and why fraud and manipulation may have different effects on the spot and futures markets.