SEC Cracks Down on Crypto Industry by Designating Filecoin (FIL) as Unregistered Security

Introduction

The US Securities and Exchange Commission (SEC) has been intensifying its measures against the crypto industry, and recently, it has come down on crypto fund provider Grayscale for offering an unregistered security related to Filecoin (FIL). This article will explore the issue further and determine whether FIL is, in fact, a security.

Grayscale Banned from Offering Filecoin Fund to Investors

Grayscale had planned to create a trust fund related to Filecoin, but the SEC has banned the company from offering this fund to investors. The policy maker sees FIL as an unregistered security, which is why it has taken strict action against Grayscale. In a press release, Grayscale mentioned that it is in regular contact with the SEC regarding the status of the assets it offers in its funds. Previously, it had filed a Form 10 with the SEC to make the Filecoin fund available to investors; however, it was informed by the regulator that Filecoin meets the definition of an unregistered security. Therefore, Grayscale is not allowed to offer the fund to interested parties.

Grayscale Believes FIL is Not an Unregistered Security

Although Grayscale cannot offer the fund to investors, it does not have to close the fund itself, and its contents will remain under the company’s control. Remarkably, Grayscale notes in its press release that it does not believe FIL is an unregistered security and that it will explain to the SEC why it believes so. However, the company also states that it cannot accurately gauge the actions of the SEC. It is possible that in the future, the fund will instead be listed on the stock exchange as an investment fund rather than a trust fund or even be completely dismantled.

SEC Remains Unyielding Towards the Crypto Industry

The SEC has been focusing on cracking down on companies it believes offer unregistered securities. For instance, Kraken had to stop offering Strike due to this reason. Coinbase has gone so far as to file a lawsuit against the SEC, stating that it does not offer clear rules. Last year, the SEC contacted Grayscale as it had already deemed a number of altcoins to be securities. At the beginning of this year, it also declared that cryptocurrencies after bitcoin (BTC) are also securities.

Is FIL a Security?

The determination of whether FIL is a security will be the key factor in the SEC’s crackdown on Grayscale for offering an unregistered security. FIL was designed as a decentralized storage platform that allows users to rent unused storage space on their computers to others. It operates through a blockchain-based network, and the FIL token is the native cryptocurrency of this network.

Grayscale argues that FIL is not a security because it is not an equity, it does not offer a stake in any enterprise, there is no profit-sharing arrangement, and FIL holders are unable to manage or direct any part of the network. According to Grayscale, FIL operates more like a commodity such as gold or silver, and its value is purely based on supply and demand.

On the other hand, the SEC argues that FIL is a security due to the Howey Test, which determines whether any given transaction qualifies as an “investment contract.” This test checks for four conditions:

• Investment of money
• Expectation of profits
• Investment in a common enterprise
• Profits generated from the efforts of others

The SEC states that FIL meets all four conditions of the Howey Test and is thus considered a security.

Conclusion

The controversy over whether FIL is a security will determine the future of Grayscale’s Filecoin fund. While Grayscale insists that it is not an unregistered security, the SEC remains firm in its stance. This development also underscores its crackdown on the crypto industry as a whole. As of now, it remains to be seen how Grayscale and other crypto-related firms will respond to the SEC’s recent actions.