Such alleged arbitrary treatment is at the center of Grayscale's lawsuit against the SEC, filed after the regulator on June 29, 2022, denied an application to convert the Grayscale Bitcoin Trust, known by the symbol GBTC, to a spot bitcoin ETP.
In its October 2022 opening brief, Grayscale argued that the SEC arbitrarily determined that a proposed rule change sought by NYSE Arca to list and trade shares of the trust wasn't designed to prevent fraud and manipulation, even though bitcoin futures ETPs approved by the SEC are exposed to exactly the same fraud and manipulation risks.
Volatility Shares' 2x Bitcoin Strategy ETF began trading on June 27, Mr. Verrilli's letter said. The fund, which seeks to double the performance of the S&P CME Bitcoin Futures Daily Roll index each day, is leveraged, the letter said.
"As a result, it exposes investors to an even riskier investment product than traditional bitcoin futures exchange-traded products," Mr. Verrilli said in the letter, which also said that the 2x Bitcoin Strategy ETF is "exposed to even more risks of the bitcoin markets than Grayscale's proposed spot bitcoin ETP."
The letter also referenced a registration statement for the 2x Bitcoin Strategy ETF, which indicated that an investor in it "could potentially lose the full value of their investment within a single day."
As part of federal appellate court procedure, a rule allows a party to submit supplemental information to the court if something significant happens after oral arguments that strengthens its case, "so that's what this letter is," Craig Salm, Grayscale's chief legal officer, said in an interview.
Grayscale left the courtroom after oral arguments in March "feeling very strong about our commonsense and compelling case," Mr. Salm said. Grayscale is making sure the court is aware of the new development in the case, which it believes further strengthens its argument, he said, adding that "on behalf of our investors, we have to do everything possible to make sure we get the right outcome in this case."
What the SEC would do if Grayscale wins was a topic that came up during oral arguments "and they're left with three options," Mr. Salm said. One would be to approve GBTC's conversion to a spot bitcoin ETF — a term used colloquially as Grayscale's product technically would be an ETP — as well as approving spot bitcoin ETFs proposed by other issuers, he said.
"We obviously believe that that's what the SEC should be doing," Mr. Salm said.
A second option would be for the SEC to come up with another reason to deny spot bitcoin ETFs, though if Grayscale wins the case, overcoming the concern about potential fraud and manipulation, it's difficult to understand what that might be, he said.
The third option would be to treat spot bitcoin ETFs and bitcoin futures ETFs the same by opting to "undo" bitcoin futures ETFs, Mr. Salm said. That option was also addressed in Mr. Verrilli's letter.
"While the Commission could theoretically correct its discriminatory treatment of spot bitcoin ETPs by rescinding its approval of all bitcoin-based ETPs … the Commission's apparent willingness to permit even a leveraged bitcoin futures ETP — a particularly high-risk version of a bitcoin futures product — makes clear that the Commission has no intention of doing so," the letter said.
Consequently, "the only way to eliminate the Commission's unequal treatment of bitcoin-based ETPs is to allow proposed spot bitcoin ETPs like Grayscale's to begin trading," Mr. Verrilli's letter said.
The SEC declined to comment on the letter.