Crytpo ETF Filing Made and Withdrawn Next Day
On February 11, 2019, an existing series ETF trust registered under the Investment Company Act of 1940, as amended, made a filing to create a new series that would have invested up to 15% of its assets in blockchain futures. The filing created great interest among practitioners in the cryptocurrency field, given that in January 2018 Dalia Blass, the Director of the SEC’s Investment Management Division (IM), issued a public letter to the Investment Company Institute and the Securities Industry and Financial Markets Association (SIFMA) that raised five major issues that IM believed needed to be resolved to its satisfaction before IM would deem appropriate registration of funds that intend to invest substantially in cryptocurrency and related products: valuation, liquidity, custody, arbitrage and potential manipulation and other risks.1 The letter caused more than 10 filings to be withdrawn at the time, and no new crypto-related ETF filings for investment companies had been made since.2 This new filing made practitioners wonder whether (1) the staff of IM had resolved the questions raised in the January 2018 letter or (2) (perhaps more likely) a 15% investment in blockchain futures fell below the “invest substantially in cryptocurrency and related products” threshold.
On February 12, 2019, the filing was withdrawn by the registrant “at the request of the Staff of the U.S. Securities and Exchange Commission.” This withdrawal of course could be for a number of unrelated reasons, but a strong possibility is that the filing was deemed to be in contravention of the January 2018 letter.
CFTC Divisions Announce Examination Priorities, Include Cryptocurrency Surveillance
On February 12, 2019, the Commodity Futures Trading Commission (CFTC) announced its 2019 Examination Priorities for registrants of the Division of Market Oversight (DMO), Division of Swap Dealer & Intermediary Oversight, and Division of Clearing and Risk. As a part of an initiative to promote transparency, this marks the first time the CFTC has published examination priorities for its divisions.
As a part of its Compliance Branch’s 2019 Examination Priorities, DMO included a focus on cryptocurrency surveillance practices. DMO stated that each of the areas it listed as an examination priority is likely to be the focus of an examination addressing one or more designated contract markets (DCMs). The target period for such examinations will typically be a six-month period, and DMO’s Compliance Branch anticipates that most DCMs will undergo at least one examination in 2019.
______________________________________________________
1 For a detailed description of the letter, please see our newsletter “Letter to ICI and SIFMA Lays Out Concern of Staff of SEC’s Division of Investment Management about Funds Investing Primarily in Cryptocurrencies”, January 22, 2018.
2 A number of filings for cryptocurrency-related ETFs have been made since the letter, but none of those registrants is deemed to be an investment company and thus the filings are not reviewed by the Division of Investment Management.
