The SEC Division of Trading and Markets and Division of Corporation Finance (the "Divisions") commented on the SEC's September 9th Order temporarily suspending trading of certain bitcoin and ether tracking certificates. The Divisions asserted that the lack of accurate and consistent information pertaining to Bitcoin Tracker One and Ether Tracker One (together, the "certificates") led to confusion amongst market participants. The Divisions cautioned market participants that seek to quote, trade, or facilitate transactions in the certificates to examine the legal and regulatory implications of doing so. The SEC staff is currently working with the CFTC staff in connection with the regulatory considerations relevant to the certificates under the Commodity Exchange Act.
Commentary / Mark Highman
The Divisions' statement highlights the importance of categorizing virtual currency-related products for regulatory purposes. Here, the Divisions noted that the certificates were variously described as "exchange-traded funds" and "exchange-traded notes," which are subject to different regulatory treatment. The Divisions also noted the interrelationship between the regulation of virtual currency-related products under the U.S. securities laws and the CEA, which may implicate commodity pool and swaps regulation. While the Divisions did not indicate how the SEC would treat the certificates for regulatory purposes, they noted certain product features relevant to this determination, which firms should consider more generally in deciding how to classify other virtual-currency related products. In this case, the Divisions noted that (i) the certificates were issued by a special purpose vehicle, (ii) issuers did not pay interest, were not principal-protected and had no scheduled maturity date, and (iii) payments were based on the notional amount of the certificates, with payments calculated by reference to bitcoin/ether prices in relation to the USD, resulting in a "synthetic exposure" to bitcoin/ether and the USD.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
