Grayscale, SEC in private talks about GBTC transition to spot ETF, SEC chairman mentions exchange involvement in front-running, acting as market maker

Foreign media pointed out that Grayscale, the asset management firm, met with the SEC last week to negotiate the transition of GBTC to a Bitcoin spot ETF. Meanwhile, SEC Chairman Gary Gensler stated in another interview that exchanges front-run users and often act as counterparties to users, expressing concerns about exchanges also serving as stablecoin issuers.

Grayscale, SEC Private Meeting

CNBC reported that Grayscale, the asset management firm, held a private meeting with the U.S. Securities and Exchange Commission (SEC) last week to convince the regulatory agency to transform GBTC into a spot ETF.

According to the report presented by Grayscale:

1. Converting to a Bitcoin spot ETF could help offset the current 20% discount on GBTC, unlocking up to $8 billion in value for investors.

2. The risks associated with a spot ETF are not higher than a Bitcoin futures ETF, and the trends of the futures benchmark and spot index show a high degree of overlap. The trading spread between the two over the past 12 months has been only 0.04% as shown below.

3. The 1934 Securities Exchange Act and the 1940 Investment Company Act

In early April, the SEC approved a Bitcoin futures ETF issued by Teucrium under the 1934 Securities Exchange Act, a departure from the application path under the 1940 Investment Company Act used for previous ETFs.

This further strengthens the possibility of a spot ETF approval. Grayscale emphasized in the report that the SEC should not block a spot ETF using the 1940 Investment Company Act.

Grayscale also commended the SEC, stating that the agency has unique advantages to support White House executive orders, ensuring that the U.S. remains a leader in the digital asset innovation space.

SEC did not respond to CNBC regarding the meeting with Grayscale. SEC Chairman shared some remarkable insights on exchanges.

SEC Chairman Gary Gensler expressed concerns in a Bloomberg interview:

Exchanges as Counterparties for User Trades

Gensler is worried that crypto institutions do not clearly differentiate between different business functions, such as custody providers, market makers, and trading platforms, and such mixed services may not align with the best interests of users:

The cryptocurrency sector faces many challenges, including exchanges engaging in front-running of user trades. In fact, exchanges often trade against their users because for users, the exchange acts as the market maker for orders.

Exchanges as Issuers of Stablecoins

In the interview, Gensler mentioned that the three major stablecoins in the current crypto market, Tether USDT, USD Coin USDC, and Binance USD BUSD, are all issued by exchanges:

I don't think this is a coincidence. The three major stablecoins are all issued by exchanges to facilitate trading activities on the platform and to minimize anti-money laundering (AML) and know-your-customer (KYC) verifications as much as possible.