For those who attended our seminar in August on “History of and Accounting for Crypto Assets,” we ended that session with a discussion of what future developments might be expected given the recent scandals but also given the interest by Wall Street firms and other entities in the Crypto asset ecosystem. On the one hand, there are investigations on-going into possible fraud and criminal conduct by certain individuals and firms. On the other hand, there is the desire from individuals and firms to expand the use of digital products and support services in the economy.
The Securities and Exchange Commission (“SEC”) has been particularly active in the investigations into possible fraud and criminal conduct and to establish its jurisdiction over the participants and activities in a variety of aspects involving Crypto assets. For example, as we mentioned in the training presentation, the Securities and Exchange Commission charged Coinbase, Inc. with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.
It turns out there was another case involving the SEC that was much further along involving GRAYSCALE INVESTMENTS, LLC. This case reached the United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT on March 7, 2023, and was just decided on August 29, 2023. This case is interesting to us not just because of the specific matters being litigated, but also because it gives insight into what the SEC attitude and approach has been on matters in this area.
Background provided by the court filing itself:
“This case involves two kinds of exchange-traded products (“ETPs”)—those holding bitcoins and those holding bitcoin futures. …Bitcoins are cryptocurrency, a kind of digital “token” that can be used to pay for goods and services directly or exchanged for traditional currencies. Bitcoin is not tracked through bank ledgers like traditional currencies. Instead, bitcoin transactions are recorded on a blockchain maintained by a decentralized computer network.”
We knew that of course; it almost came right from our training slides. But further:
“As with commodities, there are spot and futures markets for bitcoin. A spot market is another term for the cash market of a commodity or financial instrument. In the bitcoin spot market, cash is exchanged for bitcoin, with delivery expected immediately. In a derivatives market, by contrast, the financial instrument being traded derives its value from the underlying spot market but is not traded on that market. One such derivative is a future, which is a contract to buy or sell an asset at a predetermined price on a specific later date. Futures contracts, which enable investors to hedge against risk, trade on commodity futures exchanges….”
The court filing goes on to indicate what the SEC’s history has been in this area:
“Over the last several years, the Commission received numerous proposals to list bitcoin investment products on national exchanges. The Commission denied every proposal to list a bitcoin ETP.”
That previous complete denial part is not surprising, but here is the surprising part:
“Two bitcoin futures ETPs, however, were recently approved by the Commission.”
So, it turns out that the SEC has begun to approve some of these types of digital investment products. As we said in the training presentation, developments like this involving Wall Street financial firms beginning to innovate in the Crypto area could be the beginning of broader acceptance and use of Crypto assets. So, stay tuned for future developments. As we said in the training presentation, “Crypto may soon be coming to a client near you!”
Author: Don DePascal, Technical Vice President, Murdock Martell