Bitcoin and the S.E.C.

January 24, 2018

SEC Guidance

A thermometer measuring Bitcoin right now would shatter. Cryptocurrencies like Bitcoin are “red-hot” following a banner year where Bitcoin (the first, largest, and most well-known) surged 1,500%. However, these cryptocurrencies are not without their detractors or hurdles. Like the mercury of a broken thermometer, trading Bitcoin may also be quicksilver, attractive, and dangerous—at least according to the Securities and Exchange Commission’s (“SEC”) guidance last Thursday.

The no-action letter drafted by the SEC discusses cryptocurrencies like Bitcoin generally, direct-investment funds, as well as other securities based on cryptocurrencies such as Bitcoin futures contracts. The SEC appeared somewhat hesitant in its approach, saying:

We appreciate that proponents of cryptocurrencies and related products have identified a range of potential benefits. We are also aware that critics of cryptocurrencies have raised various concerns regarding transparency of information, trading, valuation and other matters related to the nature of the underlying assets.

The industry response to this letter seems understanding and optimistic: “It gives a template for how to get to a yes.”

History of Bitcoin

Bitcoin was the first cryptocurrency. It was invented in the aftermath of the 2008 recession. Bitcoin is based on a technology known as “blockchain,” which also gets its own independent headlines these days. Blockchain is an electronic ledger that is independently maintained by many servers, which makes it nearly impervious to tampering. This seeks to ensure that nobody can spend a Bitcoin twice, or simply magick them from thin air. Instead, you can either “mine” a Bitcoin—essentially compensation for running the program that maintains the ledger of transactions—or by exchanging a Bitcoin.

A search in All Major Newspapers on Westlaw shows that the earliest reference these sources have on Bitcoin was from May 1st, 2011. Recently, the Winklevoss Twins, who infamously sued Mark Zuckerberg on the claim that Zuckerberg had stolen the idea of Facebook, became the first “Bitcoin Billionaires.” However, the meteoric growth of Bitcoin and other cryptocurrencies has many economists drawing comparisons to other commodities “bubbles,” such as Tulip Mania in 1636 and 1637.

Exchanges

A person can mine Bitcoins and other cryptocurrencies, as mentioned before, or they can trade Bitcoin and related products through exchanges. These exchanges break down into both traditional exchanges, such as the Chicago Mercantile, as well as newer Internet/App-based exchanges such as Coinbase. The Winklevoss Twins want to create their own fund that invests in Bitcoin directly, but other products based around Bitcoin—such as Bitcoin Futures—are being created and implemented at a rapid pace. The rapid increase in value, the proliferation of new cryptocurrencies, and the impact on traditional exchanges seem to be what prompted the SEC to issue its letter on January 18th.

What’s Next?

Everyone has an opinion, but nobody can prove it to anyone else’s satisfaction. That’s the fun!

SEC Letter:

Staff Letter: Engaging on Fund Innovation & Cryptocurrency-Related Holdings, 2018 WL 480851 (S.E.C. No – Action Letter Jan. 18, 2018)

Image Source: REUTERS/Dado Ruvic/Illustration

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