Grayscale Transitioning to ETF Debate | Judge Questions SEC: Do You Really Understand the Difference Between Spot and Futures?

The Grayscale asset management firm filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) in June last year after its transition of GBTC to a Bitcoin spot ETF was rejected. The two parties engaged in the first oral argument on March 8.

US Judge: Does the SEC Really Understand the Difference Between Spot and Futures?

According to Bloomberg's ETF senior analyst Eric Balchunas, the panelists at the hearing included:

• SEC: Emily Parise

• Grayscale: Former Deputy Attorney General and current Grayscale Chief Legal Officer Donald Verrilli Jr.

• Three Judges: Sri Srinivasan, Neomi Rao, Harry Edwards

SEC representative Emily Parise seemed to struggle to defend the regulatory agency's argument when questioned by the judges. The SEC's rejection of Grayscale's conversion is based on the argument that:

The key data to confirm fraud and manipulation in the spot market, and how it affects the futures market in the same way, is missing from Grayscale's application.

Judge Neomi Rao pointed out that the SEC's understanding of the relationship between "spot and futures" seems questionable:

The price of Bitcoin futures is essentially derived from the spot market, with prices fluctuating in sync 99.9% of the time. What exactly is the difference in the SEC's view? The SEC has not presented evidence to refute Grayscale's argument.

Grayscale representative Don Verrilli criticized the SEC for approving Bitcoin futures while rejecting spot ETFs, citing a contradiction:

The SEC's stance is equivalent to saying that the Bitcoin futures ETF currently trading on the CME also carries the same risks of fraud and market manipulation.

When asked by the judges if Grayscale were to win the case, whether the SEC would agree to allow Grayscale to launch spot ETFs or if both spot and futures ETFs would be taken down, the SEC representative refused to answer.

GBTC Rebound

Following the hearing, the GBTC discount narrowed from -46% to -42.11%, while ETHE saw less significant gains.

Hedge fund North Rock Digital NRD tweeted that they will go long on GBTC, ETHE, and ETCG, emphasizing that the current discount is a high-risk investment opportunity and suggesting that a likely SEC loss is on the horizon.

Even if the SEC continues to withhold approval, NRD still believes that spot ETFs will emerge after Gary Gensler steps down as SEC chairman.

The case awaits a court decision, with expectations of a 3 to 6 month timeline.