The Securities and Exchange Commission (SEC) has warned Grayscale that Filecoin, the asset underlying Grayscale’s latest attempted ETF, amounts to a security—meaning that the company must withdraw its attempt to register the fund with the SEC.
Filecoin Trust is an investment vehicle owned by Grayscale which solely invests in the Filecoin digital asset, offering investors the ability to gain exposure to the underlying coin without owning it directly. It’s similar in principle to Grayscale’s Bitcoin Trust, which has had its own problems getting past the SEC.
Grayscale had submitted an application to register the Trust with the SEC as a reporting company, which would have been the first step to attaining ETF status. Grayscale’s other investment products—such as the infamous Grayscale Bitcoin Trust (GBTC)—have passed the registration stage, albeit none have cleared the final SEC hurdle of attaining ETF approval.
As it turns out, the Filecoin Trust couldn’t even get that far. According to a press release by Grayscale, the SEC wrote to them on May 16 to advise them that it viewed Filecoin as a security, rendering the fund ineligible for SEC registration. The release does not specify if the SEC provided additional comment in support of its position that Filecoin is a security but given comments from the SEC elsewhere, it seems likely that the determination is part of a renewed effort by the commission to identify digital assets that are operating as unregistered securities.
Grayscale promised to respond to the SEC, setting out its legal position and justifying why Filecoin is not a security. Assuming Grayscale can’t convince the SEC to reconsider its position, it seems inevitable that the Trust will have to dissolve unless some alternate path to compliance can be found.
Grayscale has been butting heads with the SEC for years. Last June, the SEC again rejected an application by Grayscale to convert its Bitcoin fund —the Grayscale Bitcoin Trust into an ETF, citing unsatisfactory consumer protections. The SEC has received applications from a plethora of would-be Bitcoin ETFs, but none have received approval.
In response to the latest Bitcoin Trust rejection, Grayscale sued the SEC, arguing that the SEC’s rejection amounts to a violation of the Administration Procedure Act and the Securities Exchange Act. They argued that the SEC violated “the express statutory command that a national security exchange’s rules do not discriminate among securities issuers” by rejecting the proposed Bitcoin spot ETF while approving other vehicles which hold Bitcoin futures.
Both parties have submitted their arguments to the court, and a decision remains outstanding.
The timing of Grayscale’s application could have been better: Three Arrows Capital (3AC) had collapsed in June, sending financially ruinous ripples throughout the industry and putting regulators and lawmakers on high alert. GBTC, Grayscale and Grayscale’s parent company, Digital Currency Group (DCG), has been implicated in the 3AC collapse.
They were then caught up in the Alameda-FTX implosion, with Alameda suing Grayscale in March, accusing management of being “possessed by self interest” and enriching themselves at the expense of Trust shareholders. If the SEC was skeptical of Bitcoin ETFs initially, it likely wouldn’t have been helped by DCG and Grayscale’s association with 3AC and FTX.
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