SEC orders Grayscale to withdraw Filecoin Trust application

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Grayscale Investments has received instructions from the United States Securities and Exchange Commission to withdraw its application for a Filecoin Trust product. The decision to take this action arose from concerns surrounding the possible classification of Filecoin’s token, FIL, as a security under federal laws.

On May 17, Grayscale announced that it had submitted a Form 10 application to seek approval for the launch of an improved Filecoin Trust product on April 14.

By submitting Form 10, Grayscale wants to transform its existing Filecoin Trust product into a structure resembling a public company. This transformation would require filing quarterly reports to disclose the financial activities of the trust.

On May 16, Grayscale received a comment letter from the SEC, saying that the application aligns with “the definition of a security under the federal securities laws.”

In response, the company said that, from its perspective, Filecoin is not considered a security. It then announced plans to provide the SEC with a detailed explanation outlining the reasoning behind its stance.

“Grayscale does not believe that FIL is a security under the federal securities laws and intends to respond promptly to the SEC staff with an explanation of the legal basis for Grayscale’s position,” the company said.

The Connecticut-based firm acknowledged that it could not anticipate the response of the SEC to its explanation and whether it would lead to the acceptance of its position.

It mentioned the possibility of pursuing accommodations for the registration of the trust. However, it also cautioned that it might be compelled to dissolve the trust entirely if unsuccessful.

Following the announcement, FIL, which ranks as the 33rd largest digital asset by market capitalization, experienced a decline. As per CoinGecko, it is trading at $4.54, reflecting a decrease of 1.2 percent.

Grayscale’s GBTC investigation

This month, Grayscale Investments was entangled in another case with the SEC. In a tweet, Congressman Brad Sherman, who represents California’s 32nd Congressional District, revealed that he had written a letter to SEC Chairman Gary Gensler, urging the securities regulator to investigate Grayscale’s business practices regarding Grayscale Bitcoin Trust (GBTC) redemptions.

Sherman said that Grayscale had declined to redeem GBTC shares, citing compliance with the SEC’s Regulation M. He alleged that Grayscale’s motives behind its actions with GBTC revolved around increasing its assets under management without considering the impact on GBTC investors.

The congressman also claimed that Grayscale deliberately avoided facilitating redemptions to preserve its two percent management fees, significantly contributing to the firm’s remarkable $615 million revenue in 2021.

SEC’s campaign against digital assets

The SEC has been taking strong measures against the digital asset industry and recently imposed fines on several U.S. crypto companies. Under Gensler’s tenure, the regulatory body has taken action against exchanges like Bittrex, Kraken and Coinbase.

Kraken was penalized on February 9 for engaging in the sale of unregistered securities. As a result, the exchange was instructed to cease its staking-as-a-service program.

On March 22, Coinbase, the largest publicly traded crypto exchange in the U.S., received a legal notice that served as a precursor to potential enforcement action from the regulatory body. The notice was related to possible violations of securities laws.

The regulatory agency has also identified several digital assets, such as OMG, Dash, ALGO, Monolith (TKN), Naga (NGC) and IHT Real Estate Protocol (IHT), as offerings of unregistered securities.


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