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Volume XII, Number 271

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United States: Grayscale Appeals to DC Circuit on SEC Denial of Bitcoin ETP




On Thursday, Grayscale Investments, LLC (Grayscale) filed suit against the Securities Exchange Commission (SEC) in the D.C. Circuit asking the court to reconsider the agency’s rejection of listing a spot Bitcoin ETP on the New York Stock Exchange (NYSE). In its appeal, Grayscale argued that the SEC’s ruling regarding its spot Bitcoin ETP was “arbitrary and capricious,” because it disregarded facts about the ETP and erroneously determined that listing the ETP would be in contravention of NYSE’s duties under the Securities Exchange Act of 1934.

Previously, NYSE had filed an application for a proposed rule change with the SEC that would allow Grayscale to list its spot Bitcoin ETP on the exchange. The assets of the proposed ETP consist primarily of Bitcoin, the rights to acquire virtual currency tokens, virtual currency tokens, and the cash to cover ETP expenses. To date, no spot Bitcoin ETP has been permitted by the SEC to be listed on a registered securities exchange. A spot Bitcoin ETP would trade based on the price of Bitcoin, instead of the price of Bitcoin futures.

In denying NYSE’s request to list Grayscale’s spot Bitcoin ETP, the SEC stated that an exchange can meet its investor protection and anti-fraud and anti-manipulation requirements by “demonstrating that the exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference Bitcoin asset” or by establishing that the Bitcoin market “inherently possesses a unique resistance to manipulation beyond the protections that are utilized by traditional commodity or securities markets.” At the time, NYSE argued that it met its Exchange Act duties to “protect investors and the public interest” and that the exchange be “designed to prevent fraudulent and manipulative acts and practices.” NYSE satisfied those requirements because Bitcoin offers “novel protections beyond those that exist in traditional commodity markets or equity markets” because of its fungibility, transportability, and exchange tradability. NYSE noted that Grayscale values its holdings based on an index comprised of spot Bitcoin trading platforms that are subject to anti-money laundering and know-your-customer regulations. Despite these protections, the SEC concluded that these means remain insufficient and inferior to the required comprehensive surveillance-sharing agreement with a regulated market of significant size related to Bitcoin.

Wiley Cole also contributed to this article.




Copyright 2022 K & L GatesNational Law Review, Volume XII, Number 186
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About this Author

Stacy Fuller Investment Attorney K&L Gates Washington, D.C.
Partner

Stacy Fuller is a partner in the asset management and investment funds practice group and is based in the Washington, D.C. office. She is one of the founding members of the exchange-traded funds (ETF) sub-practice group within the asset management and investment funds practice group, and her practice focuses on the representation of ETFs, their sponsors and their boards of trustees.

Stacy works with investment company complexes and investment advisers of all sizes, counseling them on a wide range of regulatory, compliance, transactional and operational issues. She routinely guides...

202-778-9475
Clifford C. Histed, Financial Markets Lawyer, Health Care Attorney, KL Gates, Law Firm
Partner

Cliff Histed focuses on representing companies and individuals operating in highly-regulated industries, particularly in the areas of financial markets, trading, and health care, during both criminal and regulatory proceedings, and in representing clients in litigation and at trial.

Mr. Histed is a former supervisory federal prosecutor and supervisory enforcement lawyer with the Commodity Futures Trading Commission.  He has more than 23 years’ experience investigating and prosecuting official misconduct, business frauds, and criminal offenses in...

312-807-4448
Cheryl L. Isaac Washington D.C. Investment Lawyer K&L Gates
Of Counsel

Cheryl Isaac is of counsel in the firm’s Washington office, where she advises clients on compliance with derivatives laws and regulations, including those promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act by the CFTC, SEC, Federal Reserve and other federal regulators. She represents banks, commodity trading firms, asset managers and other market participants (both buy-side and sell-side) in interest rate, commodities and FX derivatives transactions, and has significant experience negotiating cleared derivatives documentation and ISDA Master...

202-778-9089
Richard F. Kerr, Investment Management Lawyer, Hedge Fund Attorney, KL Gates, Boston Law Firm
Partner

Richard Kerr is a partner in the firm’s Boston office, where he is a member of the Investment Management, Hedge Funds and Alternative Investment practice group. Mr. Kerr focuses his practice on counseling registered investment companies, investment advisers, broker-dealers and other financial institutions in connection with regulatory aspects of their operations, particularly relating to SEC and FINRA regulation. 

Mr. Kerr’s experience with financial institutions includes providing advice and counsel on a broad array of corporate, regulatory,...

617-261-3166
Of Counsel

Keri Riemer is of counsel in the Asset Management and Investment Funds group. She provides guidance to investment managers and funds on a broad range of federal securities law issues, and has extensive experience representing registered investment companies and their advisers. With her experience as Senior Counsel at the Securities and Exchange Commission, in-house counsel at a large asset management firm and outside counsel at law firms, Keri brings a unique perspective to helping clients address legal and regulatory challenges relating to their business growth goals...

212-536-4809
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