SEC Points to 'Unregulated' Spot Market in First Oral Arguments Against Grayscale

investopedia.com:

Government regulators argued that bitcoin's unregulated nature leaves investors open to fraud Tuesday, as Grayscale Investments continues to fight to convert the largest Bitcoin investment fund into an exchange-traded fund (ETF).

The asset manager is seeking to overturn a previous ruling that prohibited it from converting its Grayscale Bitcoin Trust (GBTC) into an ETF. Grayscale Investments and the Securities and Exchange Commission (SEC) presented their first oral arguments to the U.S. District Court of Appeals Tuesday morning, and the asset manager is hoping to get a ruling before the July 6 deadline for the SEC to accept or reject its application.

In Grayscale Investments, LLC v. SEC, both parties are seeking to differentiate between the spot market and futures market for Bitcoin.

The SEC has now rejected multiple spot ETF applications for Bitcoin funds on the grounds that the applicants have failed to demonstrate that the investing public will be protected from “fraudulent and manipulative acts and practices.”

However, the SEC began permitting Bitcoin futures ETFs in October 2021. In Tuesday's hearing, a lawyer for the regulator said it was “undisputed” that the spot markets for Bitcoin are “fragmented and unregulated." 

Futures-backed ETFs, on the other hand, are traded on the regulated CME futures exchange and have «surveillance sharing» agreements. Lawyers for Grayscale questioned the benefits of that surveillance, arguing that manipulation of the spot markets would ultimately show up in futures contract prices.

As of March 6, the Grayscale Bitcoin Trust (GBTC) had approximately $14 billion of assets under management (AUM). The GBTC discount to its net asset value had fallen to 42%, the lowest level in a month,