The Securities and Exchange Commission announced that it would formally consider whether to approve or disapprove rule changes to authorize NYSE Arca, Inc. to list and trade shares of exchange-traded funds based on bitcoin futures contracts traded on either the Cboe Futures Exchange or the Chicago Mercantile Exchange. The SEC solicited comments specifically regarding whether the relevant funds would have sufficient information to assess the fair value of the relevant bitcoin futures contracts, what might be the potential impact of manipulation in the underlying bitcoin markets on the funds’ net asset value; how the funds’ valuation policies might be impacted by bitcoin forks; and what might be the impact of the high margin requirements for bitcoin futures contracts on the liquidity of such markets and the ability of funds to meet redemption orders, among other topics.

All comments must be submitted within 21 days of the SEC’s announcement being published in the Federal Register; rebuttal comments must be submitted within 35 days of publication.

In January, the SEC’s Division of Investment Management issued a letter to two industry organizations stating its belief that, as of now, it was not appropriate for investment fund sponsors to seek registration of SEC-regulated funds—such as mutual funds or exchange-traded funds—to “invest substantially in cryptocurrency and related products.” This is because “there are a number of significant protection issues that need to be examined before sponsors begin offering these funds to retail investors,” said the Division. At the time, the Division implied that, until its questions were answered “satisfactorily,” it was not likely to consider for approval any registered fund to invest in cryptocurrencies. (Click here for background in the article “SEC Not Feeling Groovy About Cryptocurrencies – Tells Registered Investment Funds: Slow Down, You Move Too Fast,” in the January 21, 2018 edition of Bridging the Week.)

Last week, in response to the Division’s January letter, Cboe submitted a letter to the SEC encouraging it to view virtual currency exchange-traded products “holistically and from the same perspective that it has historically approached commodity-related ETPs: where exposure to the underlying reference asset could reasonably be included in an investment portfolio, an ETP would provide a more transparent and easily accessible vehicle for gaining such exposure, and the market infrastructure for the underlying reference asset and its associated derivatives do not give rise to significant concerns in any of the … issues raised in the Staff Letter.” (Click here for a copy of Cboe’s letter.)

Unrelatedly:

  • NFA Reminds Members to Update Questionnaires Regarding Virtual Currencies: The National Futures Association reminded introducing brokers, commodity pool operators and commodity trading advisors to update the firm-level section of their annual questionnaire if they become involved with virtual currency derivatives, and for CPOs and CTAs only, if they trade in virtual currencies of any type. (Click here to access a copy of the NFA notice and  here for additional background in the article “NFA Virtual Currency Reporting Obligations” in the January 7, 2018 edition ofBridging the Week.)  
  • ESMA Restricts Cryptocurrency CFDs: The European Securities and Markets Authority will impose a temporary restriction on the marketing, distribution or sale of contract for differences to retail investors, including CFDs based on cryptocurrencies. Two months after formal adoption by ESMA through publication of a notice on its website, there will be a maximum leverage limit for CFDs based on cryptocurrencies of 2:1. This means that retail investors will have to post at least 50 percent of the notional value of such a CFD when entering into it. Thereafter, a position must be closed out if the retail client’s open CFD margin declines 50 percent or more of the minimum initial required margin. ESMA will also impose restrictions on binary options. (Click here for background.) The Financial Conduct Authority indicated it would consider making these temporary measures permanent in the United Kingdom (click here for background).  
  • Massachusetts Stops ICOs: Massachusetts has obtained consent orders against five state-located issuers of digital tokens involved in initial coin offerings, requiring them to cease and desist from offering unregistered securities, until such securities are registered or lawfully exempt from registration. Moreover, each issuer must offer rescission of sales to investors. The entities subject to the orders are: Across Platforms, Inc., 18moons, Inc., Mattervest, Inc., Pink Ribbon and Sparkco, Inc. (Click here to access all the consent orders.)  
  • Bitcoin Trader Convicted of Money Laundering: Thomas Costanzo was convicted of money laundering in a trial held in a federal court Arizona. Mr. Costanzo purportedly assisted undercover federal agents posing as drug dealers launder funds by accommodating their purchases and sales of bitcoin over a two-year period (click here for details).

Follow-Up: Oral arguments are scheduled for April 27 in a federal court in Brooklyn, New York, in connection with Maksim Zaslavskiy’s motion to dismiss his indictment charging that he engaged in illegal unregistered securities offerings and securities fraud in connection with the initial coin offerings of two digital tokens (REcoin and DRC) organized by two of his companies, REcoin Group Foundation, LLC and DRC World, Inc. (Click here for background on Mr. Zaslavskiy’s indictment in the article “Federal Court, Treasury and SEC Provide Further Guidance on Cryptocurrencies; Subject of Criminal Complaint for ICO Asks Court to Dismiss Prosecution Claiming Cryptocurrencies Are Not Securities” in the March 11, 2018 edition of Bridging the Week.) Last week, in supplemental papers submitted by his counsel, Mr. Zaslavskiy repeated earlier arguments that the digital tokens he issued were currencies and thus not securities under applicable law, and that, in any case, the digital tokens were not investment contracts, applying the Supreme Court’s multi-prong test in SEC v. W.J. Howey Co. (click here to access). The Department of Justice and the SEC rejected these views in papers filed earlier in March. (Click here for background in the article “Department of Justice Argues Against Motion to Dismiss Indictment of ICO Sponsor Claiming That Relevant Digital Tokens Are Securities” in the March 25, 2016 edition of Bridging the Week.) Mr. Zaslavskiy's counsel also argued last week that the Securities and Exchange Commission had not given adequate notice of its view that cryptocurrencies are securities, as purportedly required by applicable law. (Click here and here to obtain copies of Mr. Zaslavskiy’s latest submissions.)