Bitcoin isn't a security according to SEC staff

Quick Take

  • SEC staff responds to ’40 Act registration for Cipher in letter stating Bitcoin isn’t a security
  • Staff relies for analysis on Howey test and SEC digital asset framework
  • While not a surprise to market participants and observers, this is an important confirmation of a key principle by SEC staff 
Cipher Technologies Bitcoin Fund ("Cipher") filed a registration statement with the SEC to become a closed-end interval fund and an "investment company" under the Investment Company Act of 1940 ("The '40 Act").  In written submissions to the Commission and in-person meeting, Cipher took the position that Bitcoin is a security.
SEC staff disagreed with Cipher's reasoning under Howey and the SEC's framework for analyzing digital assets, which was issued earlier this year.  Per the SEC's letter:
"Among other things, we do not believe that current purchasers of bitcoin are relying on the essential managerial and entrepreneurial efforts of others to produce a profit. Accordingly, because Cipher intends to invest substantially all of its assets in bitcoin as currently structured, it does not meet the definition of an 'investment company' under the Investment Company Act and it has inappropriately filed on Form N-2."

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Moreover, if Bitcoin were a security, it would "raise substantial other issues" because bitcoin would be a massive "unregistered publicly-offered security" and the fund would be an underwriter.  Staff also notes that Cipher didn't address "significant legal and investor protection issues, particularly with respect to valuation, custody and potential manipulation in the bitcoin market", which are concerns that it raised earlier this year.  For these reasons, staff concluded that Cipher incorrectly sought to register as an investment company under the '40 Act and will not conduct further review.  If Cipher wants to propose alternative structures, the letter indicates that the SEC is open to this.
While this letter is not a regulation or binding precedent, it is significant and important public confirmation that the SEC does not believe that Bitcoin is a security.  Furthermore, it shows the SEC is relying upon the framework document that it issued earlier this year for guidance and which digital assets are and are not securities.  

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About Author

Stephen Palley is a partner in Washington, D.C. office of the Anderson Kill law firm, where he is a member of the firm's nationally recognized insurance recovery practice and chair's the firm's Technology, Media and Distributed Systems practice group. The opinions expressed are his alone, not those of past, present of future clients or employers, and are not intended as legal advice.