Grayscale Filings Reveal Spat With SEC Over Security Status of Less Popular Altcoins

Digital asset manager Grayscale filed applications for Stellar (XLM), Zcash (ZEC), and Horizen (ZEN) trusts in June 2022 and then in mid-August 2022.

The second filing responded to a query by the Securities and Exchange Commission’s Division of Corporate Finance, questioning Grayscale’s analysis of the coins according to existing securities laws.

Other trusts in jeopardy?

The filings cast a dubious light on the new trusts as the bear market puts pressure on Grayscale’s other trusts.

Grayscale’s cryptocurrency trusts provide investors with easy exposure to digital assets alongside stocks and bonds. It holds billions of dollars in BTC and ETH in its Bitcoin and Ethereum trusts, compared to $40 million for the altcoins in question. At the peak of crypto markets, when bitcoin touched $69,000, the company held $60 billion in assets.

In its August filing, the firm acknowledged that the three altcoins might be securities, going back on statements made in the June filing, citing that the altcoins were not securities but could be defined as such in the future and that the SEC had provided no guidance to that effect.

While the altcoins make up a small slice of the company’s crypto holdings, the possibility that they may be securities means that Grayscale could be forced to retire its more prominent trusts.

Grayscale lawsuit against SEC

The query by the SEC highlights the agency’s push to regulate the crypto space, despite there being little consensus in the U.S. whether cryptocurrencies are securities and hence fall under the jurisdiction of the SEC.

Grayscale is locked in a legal tussle with the SEC over the agency’s rejection of Grayscale’s application to convert its Bitcoin Trust to a spot bitcoin exchange-traded fund. The conversion would offer the company a respite from the trust’s shares trading at a discount to the bitcoin price.

In June, the SEC determined that the NYSE Arca platform that would list the ETF was open to market manipulation. In response, the firm’s senior legal strategist Donald B. Verrilli Jr. filed a petition in the United States Court of Appeals for the District of Columbia Circuit to challenge the SEC’s decision.

Grayscale’s lawsuit will likely receive a ruling from the courts in the third quarter of 2023 or early 2024 and could land in the United States Supreme Court.

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