The SEC is not a fan of crypto and crypto is not a fan of the SEC
The United States Securities and Exchange Commission (SEC) has been known to take a cautious approach toward the cryptocurrency industry. The regulator’s hesitance towards the crypto industry has been evident in its approval process for exchange-traded funds (ETFs) and its enforcement actions against crypto firms for non-compliance with securities laws. The latest instance of this is Circle, the issuer of the second-largest stablecoin, USDC, blaming the SEC for its failed $9 billion merger plans with Concord Acquisition, a special-purpose acquisition corporation.
Circle’s plans halted
Circle had planned to go public last year via a merger with Concord Acquisition, but the deal fell apart in December 2020 amid turbulent markets after the collapse of the crypto exchange FTX. However, Circle now claims that the primary reason for the failed merger was the SEC’s inaction, rather than the market downturn or shaky investors. According to reporting from The Financial Times, the regulator allegedly did not approve the deal’s S-4 registration, which allows companies to issue new shares, before the expiration of the agreement. Circle stated that “We never expected the SEC registration process to be quick and easy. We’re a novel company in a novel industry.” However, 15 months after Circle first filed with the SEC, the deal expired before the regulator was satisfied enough to give approval.
The SEC’s hesitance towards the crypto industry has been evident in its approval process for ETFs. While several Bitcoin futures-based ETFs have now been approved, spot crypto ETFs such as one proposed by Grayscale have so far all been rejected or stalled. The regulator has also been hard at work on the enforcement front, as on January 12, 2021, the SEC filed charges against crypto exchange Gemini for failing to register its Earn program, powered by crypto broker Genesis, with the regulator. SEC Chair Gary Gensler stated that “We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors.” Since then Genesis has filed for Chapter 11 bankruptcy.
More Battles Ahead
The SEC currently is in a battle with Grayscale as well. Grayscale Investments, a crypto asset management firm, is preparing for a prolonged legal battle with the United States Securities and Exchange Commission (SEC) to create a spot bitcoin exchange-traded fund (ETF), according to CEO Michael Sonnenshein. The company has filed a lawsuit against the SEC in June after the regulator rejected its application to convert its flagship Grayscale Bitcoin Trust into an ETF, arguing that the proposal did not meet standards designed to prevent fraudulent practices and protect investors.
In an interview, Sonnenshein stated that he is prepared to appeal the decision if the court rules in favor of the SEC. He said that suing the regulator was one of the most important decisions he had made as CEO and that he is confident that the court will rule in the company’s favor. The case is currently being heard in front of the District of Columbia Court of Appeals and oral arguments are scheduled to occur on March 7. Grayscale expects a final ruling on the case in the fall, said Sonnenshein.
Grayscale Bitcoin Trust has $14.5 billion in assets under management, according to the company’s website. The GBTC discount to bitcoin is hovering around 41%, coming under pressure after crypto exchange FTX collapsed and crypto lender Genesis suspended withdrawals. There are further concerns about contagion as Genesis and Grayscale are both owned by venture capital Digital Currency Group (DCG) and questions have been raised as to whether DCG would have to sell its GBTC holdings.
In December, Sonnenshein told investors in a letter that if its legal challenge to the SEC is unsuccessful, Grayscale would explore options to return a portion of GBTC’s capital to shareholders.
Overtly cautious or justified?
The SEC’s cautious approach toward the crypto industry has resulted in a slow approval process for crypto firms looking to go public. The regulator’s hesitance towards the crypto industry has also been evident in its approval process for ETFs and its enforcement actions against crypto firms for non-compliance with securities laws. The case of Circle blaming the SEC for its failed $9 billion merger plans highlights the need for a more streamlined and clear regulatory framework for the crypto industry. It would seem the SEC has not created a positive response to the crypto sector and as things continue there could only be a tug of war for the months or even years to come