Freak Out?

Just like that dance craze so vividly brought to life by the 70s disco-funk band Chic, all things crypto-currency continue to generate excitement as the New Year begins. The Chicago Board Options Exchange believes that "big fun will be had by everyone" if it can list and trade shares of bitcoin-based ETFs. Meanwhile, regulators aplenty are warning about the risks of initial coin offerings (ICOs), and digital currencies' plunging market values are making heads spin all around. Find out more in this month's edition of the Bulletin.

In this bulletin:

In Brief: IOSCO and other regulators express concern about ICOs IIROC and FINRA outline their compliance priorities for 2018 OSC Finalizes Rule 72-503 Distributions outside Canada

1. Bitcoin ETFs Ready to List?

In 2017, we provided updates with respect to Blockchain technology, Bitcoin, coin and token offerings, and crypto-currencies/assets. Recently, the United States Securities and Exchange Commission (SEC) published for comment proposed rule changes by the Cboe BZX Exchange, Inc. (the Exchange) that, if approved, could lead to the public listing and trading of Bitcoin-based exchange traded funds (ETFs) in the U.S. While some Canadian regulators have tacitly approved private funds based on Bitcoin and related technology (by granting registration to investment fund managers wishing to offer such funds), the example of publicly traded, Bitcoin-based ETFs in the U.S. could be of interest to firms or exchanges wishing to bring a similar innovation to Canada.

In Brief

IOSCO and other regulators express concern about ICOs

It seems like you can't open an industry e-newsletter these days without reading about another regulator expressing concern about crypto-currency based investments. As the Board of the International Organization of Securities Commissions (IOSCO) noted in a media release published on January 18, initial coin offerings (ICOs) aren't standardized and their legal and regulatory status is likely to depend on the specific circumstances of the ICO. IOSCO also noted that, although some operators are providing legitimate investment opportunities to fund projects or businesses, the increased targeting of ICOs to retail investors through online distribution channels by parties

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In connection with its proposal to list and trade shares of several Bitcoin-based ETFs, the Exchange has sought the SEC's approval to, in effect, exempt these particular ETFs from the application of certain of the Exchange's listing requirements designed to prevent market manipulation. The SEC published the Exchange's proposed rule changes for public comment on December 28, 2017 and January 2, 2018, respectively (collectively, the Requests for Comment).

The Exchange believes that the rule exemptions are appropriate because there will be other factors mitigating the risk of market manipulation, including expected liquidity levels in the market for listed Bitcoin derivatives and surveillance procedures applicable to the Bitcoin futures contracts and the Bitcoin-based ETF shares. As well, the Exchange believes that "the nature of the bitcoin ecosystem" makes manipulation of bitcoin difficult.

The Exchange also submitted that investors will benefit from the listing and trading of these ETFs. According to the Exchange, the shares will provide an inexpensive and simple vehicle for investors to gain long or short exposure to bitcoin in a "secure and easily accessible product that is familiar and transparent to investors" and enhance the security afford to investors as compared with a direct investment in bitcoin.

Although the proposed rule changes are quite technical, the anticipated commentary on the Requests for Comment and the SEC's response to that commentary may offer insight into the potential for a public market in Bitcoin-based ETFs. AUM Law will continue to follow these developments and is happy to discuss with you any plans that you may have in the Blockchain, Bitcoin, coin and token offerings, and crypto-currency space.

2. The Initial Coin Offering (ICO) Process Compared to the Initial Public Offer (IPO) Process Initial coin offerings (ICOs) typically involve the creation of digital tokens, using distributed ledger technology, and their sale to investors in return for a cryptocurrency. In light of recent market interest in such offerings, we think this comparison between the traditional IPO process and a typical ICO process might be helpful.