On January 18, 2018, the SEC indicated in a no action letter to two fund sponsors that it could not provide no action assurances as to the sponsors' applications for exchange-traded funds (ETFs) based on bitcoin futures, and raised significant questions for potential cryptocurrency-related ETF sponsors.
The SEC indicated that the answers to its questions will be important to the ongoing analysis of filings for exchange-traded products and related changes to exchange listing standards, in the context of funds seeking to register under the Investment Company Act of 1940 who intend to hold cryptocurrency or related products. The recent SEC letter (and the SEC's rejection of two bitcoin-based ETF proposals in 2017) evidences its skepticism as to whether funds tracking bitcoin and other cryptocurrencies could comply with the securities laws enacted to protect investors. In the January letter, the SEC indicated that discrepancies between the cryptocurrencies' volatility and potential illiquidity and funds' needs to disclose daily fair market prices for their portfolios and provide adequate liquidity to investors must be addressed before fund sponsors may launch funds backed by cryptocurrencies and related products. The SEC also has expressed reservations about initial coin offerings (ICOs), emphasizing that the form of transaction does not change the substance and that many ICOs in fact involve an offering of securities that should comply with applicable registration and other securities laws requirements.
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