What does the grayscale SEC registration application mean for the encryption industry if it is approved?

This article comes from Cointelegraph , the original author: Kirill Bryanov

Odaily Planet Daily Translator | Nian Yinsi Tang

On November 19th, Grayscale Investments, a subsidiary of Digital Money Group and the world's largest digital asset management company, submitted a Form 10 to the US Securities and Exchange Commission (SEC) on behalf of its Grayscale Bitcoin Trust (GBTC). Voluntary registration statement.

Once this registration application is successful, it will be granted the status of the SEC reporting company, and GBTC will be the first cryptocurrency investment instrument registered with the SEC. Therefore, the shares of the trust will be registered under the Securities Exchange Act of 1934.

Grayscale Investments expects this development to expand the investor base of the product and provide greater transparency and liquidity to investors who already hold shares in the trust. However, the company also stressed that it is seeking neither the status of an exchange-traded fund (ETF) nor its listing on a national stock exchange.

So what does it mean for GBTC and the broader encryption industry if the regulator really approves it?

How does the Bitcoin Trust work?

An investment trust is a company that has a fixed amount of certain assets and issues contracts that represent its share of ownership. Investors holding these shares are also required to pay the company that manages the trust. Currently, the proportion of each GBTC is slightly less than 0.001 BTC, and the annual fee is 2%. The share of ownership under the contract will slowly decrease over time. The trust fund holds a total of approximately 175,000 bitcoins.

Launched in September 2013, GBTC began trading in May 2015 and is a “traditional investment vehicle” whose structure is well known to financial and tax advisors. Although the company has repeatedly stressed that the product is not an ETF, the GBTC model is similar to many ETFs based on popular commodities. These stocks are eligible to be traded through brokers and can be deposited in personal retirement accounts or accounts with tax benefits such as 401(k).

Note: The 401(k) plan, also known as the 401K clause, began in the early 1980s as a fully funded pension system established by employees and employers. The plan was stipulated in the new Article 401 k clause of the 1978 Domestic Tax Law of the United States. It was legally recognized in 1979 and the implementation rules were added in 1981. It developed rapidly in the 1990s and gradually replaced it. The traditional social security system has become the social security plan of choice for many employers in the United States. Suitable for private for-profit companies.

GBTC shares are publicly traded on the over-the-counter market OTCQX. Unlike exchanges, this decentralized market usually holds stocks of smaller companies and enforces less stringent reporting requirements.

GBTC is currently marketed under the Alternative Reporting Standard, which does not require registration with the SEC. Investing in OTC securities is generally considered to be more risky than trading on an exchange.

While this solution helps qualified investors gain access to Bitcoin, the current reporting standards may not be sufficient for many funds that may be interested in digital assets but are concerned about lack of transparency. Other funds may only have formal restrictions on securities transactions that are not registered with the SEC. In addition, other disadvantages that GBTC may inhibit investor enthusiasm include annual fees and high premiums.

Despite these limitations, the fund's performance this year is still very robust. First, in less than six months (from February to June), its share price soared more than 300% due to a high premium, even surpassing Bitcoin, which rose 223% over the same period. Grayscale's general manager Michael Sonnenshein said in an interview with CNBC that the volume of GBTC transactions in the first three months has tripled.

Sonnenshein also pointed out that Grayscale Investment's bitcoin products saw strong demand from institutional investors seeking digital asset exposure – 84% of the inflow of funds in the third quarter of 2019 came from unencrypted hedge funds.

What does Form 10 do?

The SEC's Form 10, also known as the General Form for Securities Registration, is a document that provides investors with all the relevant information they may need when making an investment decision.

The Transaction Act requires companies with assets of more than $10 million and more than 750 shareholders to submit registration statements on Form 10, and companies below these thresholds can voluntarily submit. Form 10 registration is one of the securities registration requirements for trading on the US exchange. The other is the approval of the Financial Industry Regulatory Authority.

The registration statement is considered valid 60 days after submission, although the SEC may have additional questions or comments. Once registration is in effect, it triggers a series of reporting requirements, including annual, quarterly, and current reports; annual agency statements and management and shareholder beneficial ownership reports.

No pain no gain

Grayscale Investments' apparent move is to raise its reporting standards so that GBTC attracts more institutional investors. In addition to its potential to be the first to report digital asset-based securities in the history of the SEC, it will also bring about tangible changes – liquidity improvements.

Although investors are currently required to hold their private equity for at least one year, if the trust is approved by the SEC, the deadline will be shortened to six months. Michelle Gitlitz, Global Head of Blockchain and Digital Assets at Crowell & Moring, said:

“If grayscale gets the status of a reporting company, it will increase transparency for investors and may encourage more people to invest in the fund. More investors mean that shareholders have more liquidity, and this benefit is not small. Investors who are currently restricted to non-SEC-regulated reporting companies will also be able to invest."

The biggest question is, how much revenue can grayscale get after registering with the SEC? Alexander Blum, chief operating officer of financial technology company Two Prime, believes that this move will promote incremental change rather than an instant outbreak:

“If the grayscale Form 10 application is approved and becomes a reporting company registered with the SEC, GBTC will continue to mature and become a regulated mainstream investment tool, and its reporting requirements will increase. However, I It is not expected that a large number of new funds will flood into or be listed on new exchanges, but will continue to grow steadily."

Dmitriy Berenzon, research partner at blockchain capital firm Zenith Ventures, said he believes the registration of GBTC is expected to trigger a trend toward greater transparency across the industry:

“My expectation is that the grayscale move will drive more encryption companies to voluntarily disclose more comprehensive information on a more consistent basis. For example, the Tezos Foundation publishes a detailed half-year update, and the Ethereum Foundation publishes quarterly updates. , but I look forward to seeing all the cryptographic asset-related foundations release detailed quarterly reports."

Not everyone can

Blum from Two Prime also believes that although many other participants in the digital asset space may be interested in this move in grayscale, only a few people can actually remove this barrier:

“This is not a huge change in the rules of the game. Other participants may be interested in emulating, but from a logistical point of view – including quarterly reports to the SEC, auditing, accounting, and heavy legal and financial oversight – this will be Expensive and requires a lot of labor. This is a very high obstacle for new players."

When it comes to the possibility of GBTC's approval of this application, Blum said that the trust is the best candidate for approval given its current regulatory status and assets under management.

Unlike Bitcoin ETF applications, grayscale does not seek to approve a new, promising product, but simply continues to use a successful product that is already running and well documented.