Each of those filings discusses the relevant listing exchange’s intent to enter into a surveillance-sharing agreement with Coinbase, which operates “a major U.S. spot bitcoin trading venue,” the letter said.
“News of the proposed Coinbase surveillance-sharing agreements was greeted in some quarters as a breakthrough for the prospect of Commission approval of spot bitcoin ETPs,” Grayscale’s comment letter said. “But as the Commission knows, the possibility of a surveillance-sharing agreement between a listing exchange and a spot bitcoin trading venue is not a new idea.”
Indeed, Grayscale discussed the viability of such an approach with SEC staff in 2019, the letter said.
As Grayscale has explained in its pending lawsuit against the SEC, “the Commission is already in a position to approve spot bitcoin ETPs based on the standard it has previously articulated, though a surveillance-sharing agreement with a spot bitcoin trading venue in and of itself would neither satisfy nor be necessary under that standard,” Grayscale’s letter said.
Grayscale filed its lawsuit after the SEC in June 2022 denied a proposed rule change filed with it by NYSE Arca to list and trade shares of the Grayscale Bitcoin Trust.
In referring to the “Commission’s Section 6(b)(5) standard,” the letter said that in order to approve a national securities exchange’s proposed rule change under a Rule 19b-4 filing, the SEC must conclude that the proposal is consistent with the requirements of Exchange Act Section 6(b)(5), “which requires that the rules of the exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest,’ and ‘not designed to permit unfair discrimination between . . . issuers.'”
The SEC has determined that an exchange seeking to list bitcoin-based ETPs can meet its obligations by demonstrating that it “has a ‘comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets,'” the letter said.
As explained in its briefs and argument in its case before the U.S. Court of Appeals for the District of Columbia Circuit, Grayscale agrees with the reasoning in each of the seven spot bitcoin ETP Rule 19b-4 filings that, “having determined the CME bitcoin futures market meets the Commission’s stated criteria for a ‘market of significant size’ in the context of bitcoin futures ETPs, the Commission is logically bound to reach the same conclusion in the context of the Trust and other spot bitcoin ETPs,” the letter said.
While Grayscale “strongly supports a Commission approach that would facilitate approval of all spot bitcoin ETP proposals,” approving only the seven Rule 19b-4 filings referenced in Grayscale’s letter “would reflect a positive but sudden and significant change in the Commission’s application of the relevant statutory standard,” the letter said.
Such a move would “improperly grant an unfairly discriminatory and prejudicial first-mover advantage to these proposals,” Grayscale’s letter said.
“An approval that promotes investor protection and fairness for issuers should therefore be made simultaneously with approval of all proposed spot bitcoin ETPs, including those such as the Trust whose Rule 19b-4 filings were previously disapproved after lengthy Commission consideration,” the letter said.
An SEC spokesman Friday declined to comment on the letter.
