SEC Deepened Its Review of Grayscale’s Spot Bitcoin Fund

The U.S. Securities and Exchange Commission on February 4, 2022 opened formal proceedings to determine whether to approve or disapprove NYSE Arca’s proposal to list shares of Grayscale Bitcoin Trust as a spot bitcoin exchange-traded product.

The order did not approve the conversion, and it was not a final rejection. The Commission expressly said that instituting proceedings did not indicate that it had reached conclusions about the proposal. It instead kept the application under review and identified the evidentiary questions that NYSE Arca and other commenters would need to address.

That distinction mattered because regulated bitcoin futures funds were already trading in the United States, while a product holding bitcoin directly had not received equivalent clearance. Grayscale and NYSE Arca maintained that spot and futures products were both exposed to bitcoin’s underlying price formation. The SEC was not yet persuaded that the proposed safeguards satisfied federal exchange-law requirements.

What Grayscale proposed

NYSE Arca filed the proposed rule change on October 19, 2021, and the SEC published it for comment on November 8. The application sought to list Grayscale Bitcoin Trust shares under NYSE Arca Rule 8.201-E, which covers commodity-based trust shares.

Under the proposal summarized by the SEC, the value of each share was intended to reflect the bitcoin held by the trust, less expenses and liabilities. The reference index would calculate a U.S.-dollar bitcoin price at 4 p.m. New York time using volume-weighted trading data. As of June 30, 2021, its constituent platforms were Coinbase Pro, Bitstamp, Kraken and LMAX Digital.

The proposed structure also provided for creations and redemptions in baskets of 100 shares in exchange for the corresponding quantity of bitcoin. In interpretation, that mechanism was important because creations and redemptions could help market participants align share prices with the value of the trust’s bitcoin. The mechanism remained only a proposal on February 4, however; the SEC had not authorized it.

Manipulation remained the central test

The Commission focused its review on Section 6(b)(5) of the Securities Exchange Act, which requires exchange rules to be designed to prevent fraudulent and manipulative practices and protect investors and the public interest.

Its questions covered the liquidity and transparency of spot bitcoin markets, the shares’ susceptibility to manipulation and whether the proposed index could sufficiently reduce the effect of anomalous trading on any one venue. The SEC also sought evidence supporting the argument that the regulated Chicago Mercantile Exchange bitcoin futures market was a market of significant size connected to the proposed product.

The order highlighted a Grayscale analysis covering November 1, 2019 through August 31, 2021. Grayscale had concluded that there was no significant lead-or-lag relationship between the CME futures market and the spot index. Rather than accept that conclusion, the SEC asked commenters to evaluate the methodology and its regulatory significance.

Written comments were to be accepted for 21 days after the order’s subsequent publication in the Federal Register, with rebuttals due 35 days after publication. Those relative periods—not final calendar deadlines—were what the February 4 order established.

Why the proceeding mattered

The decision placed market surveillance, reference-price integrity and comparable treatment of futures and spot products at the center of the institutional bitcoin debate. Conversion could have moved an existing bitcoin trust into an exchange-traded structure with ongoing creation and redemption processes. Continued review preserved that possibility but offered no assurance of approval.

Contemporaneous Reuters coverage therefore described the action as a delay. That was accurate as a practical market summary, but the legal action was more specific: the SEC instituted proceedings and requested additional evidence before reaching a final decision.

Later context

Later records should not be read backward into the February 4 assessment. The SEC disapproved the proposal on June 29, 2022. The D.C. Circuit vacated that decision on August 29, 2023, and the SEC ultimately approved the relevant exchange rule change on January 10, 2024. None of those outcomes was known on February 4, when approval, rejection and further amendment all remained possible.