SEC regulators reject bid for a Bitcoin ETF

The Securities and Exchange Commission is facing a new lawsuit in federal court, filed late Wednesday, after the agency denied an application to create an exchange-traded fund that would let investors bet on bitcoin via the stock market.

The rejection came despite a campaign by the digital asset management firm Grayscale that enlisted support from market luminaries and generated more than 11,000 comment letters.

A “spot” ETF that invests in bitcoin has long been a goal for the cryptocurrency industry. The SEC had already rejected several attempts by the Winklevoss brothers and others.

Since 2013, Grayscale has run a bitcoin trust that lets investors trade shares in crypto it holds. But the trust has limitations — like high fees and no redemption mechanism — and has been trading at a discount to the price of Bitcoin.

Grayscale argues that converting its trust into an ETF would “unlock billions of dollars of investor capital while bringing the world’s largest bitcoin fund further into the U.S. regulatory perimeter.”

But the SEC ruled that the company had not made its case, in part because its proposal did not meet the standard that it must “prevent fraudulent and manipulative acts and practices” and “protect investors and the public interest.” In other words, the agency has concerns about the underlying crypto market that Grayscale could not assuage.

The firm promptly appealed in federal court in an attempt to reverse the decision. Its senior legal strategist, Donald Verrilli Jr., a former US solicitor general, said in a statement that regulators were acting “arbitrarily and capriciously.”