SEC warns that Filecoin ‘meets definition of a security’ — Grayscale

The regulator has asked Grayscale to withdraw its application for a Filecoin Trust product, saying it believes its underlying asset is a security.

The United States Securities and Exchange Commission (SEC) has asked Grayscale Investments to pull its application for a Filecoin Trust, warning that its underlying asset, Filecoin (FIL), can be seen as a security.

According to a May 17 announcement from Grayscale, the firm initially lodged a Form 10 application with the regulator to launch an updated Filecoin Trust product on April 14.

The Form 10 would see the firm’s pre-existing Filecoin Trust product become more akin to a public company, which would file quarterly reports on its financial activity.

Grayscale said it received a comment letter from SEC staff on May 16, where regulator then warned that FIL “meets the definition of a security” under federal law and asked them to withdraw their application for the trust product.

Grayscale stated that in its view, Filecoin is not a security and it would be sending an explanation to the SEC for its reasoning.

“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 noted that it “cannot predict” whether or not the SEC will be persuaded into accepting its explanation, and may “seek accommodations” for the registration of the trust. Alternatively, the investment firm warned that it may be forced to dissolve the trust in its entirety.

The Grayscale Filecoin Trust was launched by the asset manager on March 17, 2021 alongside similar offerings for oracle network Chainlink (LINK) and metaverse platform Decentraland (MANA)

ANNOUNCEMENT: 5 new products have been added to the @Grayscale line up!

Basic Attention Token $BAT
Chainlink $LINK
Decentraland $MANA
Filecoin $FIL
Livepeer $LPT

Interested? https://t.co/YfK2YUKgCj pic.twitter.com/jLqDph4MEH

— Sonnenshein (@Sonnenshein) March 17, 2021

Launched in 2014 by California-based tech company Protocol Labs, Filecoin is a decentralized platform for data storage, where users pay in the native FIL token to have their data stored with providers, who in turn earn FIL for their services. 

Related: SEC seeks denial of Coinbase petition for imminent crypto rules

This update from the SEC marks a continuation of the watchdog’s crackdown on crypto products, which has recently come down hard on a number of U.S. crypto exchanges.

On Feb. 9 the SEC fined U.S.-based crypto exchange Kraken for “selling unregistered securities” and ordered the exchange to shut down its staking-as-a-service program.

More recently, on March 22, Coinbase — the largest publicly traded crypto exchange in the U.S. — received a legal notice that typically precedes enforcement action from the regulator for “potential violations of securities laws.”

The price of FIL dipped briefly before rebounding and is trading for $4.53 at the time of publication, according to data from CoinGecko. 

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?

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