SEC Urges Grayscale to Withdraw Trust Registration, Labels Filecoin as a Security

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Key Takeaways:

  • The registration statement for Grayscale’s Filecoin Trust was asked to be withdrawn by the SEC.
  • Grayscale stated that it “cannot predict” if the SEC will accept their justification.

Since Filecoin, the trust’s underlying asset can be viewed as a security, the United States Securities and Exchange Commission (SEC) has asked Grayscale Investments to withdraw its application.

Grayscale announced on May 17 that the company had initially submitted a Form 10 application to the authority on April 14 to introduce an improved Filecoin Trust product. With the introduction of the Form 10, the company’s earlier Filecoin Trust offering will resemble a public corporation more closely and submit quarterly reports on its financial performance.

According to Grayscale, the SEC staff sent a letter with comments on May 16 warning that FIL “meets the definition of a security” under federal law and requesting that they withdraw their application for the trust product. According to Grayscale, Filecoin is not a security, and the company said it would provide the SEC with an explanation of why. Grayscale stated:

“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.”

Grayscale stated that it “cannot predict” if the SEC will accept their justification and that it may “seek accommodations” for the registration of the trust. Alternately, the investment company cautioned that it might be required to dissolve the trust entirely.

On March 17, 2021, the asset manager introduced the Grayscale Filecoin Trust along with equivalent programs for the Oracle network Chainlink and the metaverse platform Decentraland.

Filecoin is a decentralized data storage platform introduced in 2014 by the California-based software company Protocol Labs. Users pay in the native FIL currency to have their data saved with providers, who in turn receive FIL in exchange for their services. 

This SEC update continues the watchdog’s campaign against cryptocurrency products, which has recently targeted many U.S. crypto exchanges severely.

Why the SEC singled out the company’s Filecoin Trust is unknown. Furthermore, it is unknown if the securities watchdog will take any legal action against Filecoin or any of Grayscale’s other cryptocurrency trusts.

Judge recently denied the SEC’s request to have all documents pertaining to Hinman in its case against Ripple sealed. The court decided that because these records don’t deal with an agency stance, choice, or policy, they are not covered by the deliberative process privilege.

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