- 07.09.2020

Bitcoin fund files with sec

bitcoin fund files with secIts bitcoin fund called Grayscale Bitcoin Trust (GBTC) has assets of about $ billion, the company said, and it trades on OTCQX, an over-the-counter. However, a new entity of Fidelity has been established and is evident in the SEC filing — the Fidelity Digital Funds. Peter Jubber, who is the head.

This Note is written by Drew C. Drew C. Schaefer: J. In B. For bitcoin fund files with sec investment funds, the SEC has protections in place to assure investors that their accounts contain the assets their advisers bitcoin fund files with sec they contain.

We want an extra layer of protection between investor money and the adviser.

Plato Data Intelligence, Plato Vertical Search

However, applying the custody rule to cryptocurrencies is difficult. New cryptocurrency-focused hedge funds [11] deal in a fundamentally different kind of asset than funds holding grain futures, precious metals, or stocks.

What are Hedge Funds Investing In

On top of fraudulent advisers, bitcoin fund files with sec holding cryptocurrency face a host of novel challenges: a simple programming mistake can cause millions of dollars of client assets to vanish into the abyss, [12] hackers can bring down entire exchanges, [13] and new assets can form on top of existing assets.

As a result, if the SEC mechanically applies the custody rule to hedge funds investing in cryptocurrency, many will likely be in violation.

This Note will review why it is difficult to apply the current custody rule to cryptocurrency hedge funds, and how the rule can be modified to better fit the peculiarities of this new asset class. First, this Note looks at the present state of the rule and its general application to hedge funds.

Third, it analyzes why the current rule does not meet these challenges. Finally, this Note presents an alternative mechanism that the SEC can adopt for applying the rule.

These statements must list the balance of funds for each type of security in the account, as well as all transactions occurring during the period. The investors take a passive role while the investment manager determines strategy, manages risk.

The SEC and the Commodities and Futures Trading Commission are the primary federal agencies responsible for regulating both hedge funds and their managers. Whether the custody rule is applied to a certain bitcoin fund files with sec fund manager will depend on whether bitcoin fund files with sec are a registered investment adviser or bitcoin fund files with sec under an exemption to the Act.

As discussed above, some hedge fund managers are exempt from SEC registration altogether. The most important exemption is for private fund advisers. Their managers were therefore exempt from the custody rule. Further complicating the application of the rule, there has been much debate as to whether cryptocurrency is a security at all.

To answer this question, bitcoin fund files with sec must first look at how cryptocurrency bitcoin fund files with sec held and stored and how that differs from traditional bitcoin fund files with sec. We will then look at challenges in applying the rule to this novel financial instrument.

Cryptocurrency and Custody Unlike traditional financial assets, cryptocurrencies are not based on institutional trust.

This difference is important in the custody context. With traditional assets, we believe that a central party —whether a bank, Paypal, or a grain storage facility—is maintaining a ledger that is properly recording the assets they hold and marking which of those assets belong to us.

We do not expect to see the ledger—we trust that the institution has protections in place to prevent internal fraud and attacks from outsiders.

Blockchain, the technology that underpins cryptocurrencies like Bitcoin, is based on a fundamentally different premise. This Part will first describe how cryptocurrency functions in general, and then zero in on private keys, which relate directly to the application of the custody rule. They often vary the protocol and structure of Bitcoin, such as how the coins are generated, which programming language is used, or the number of coins issued.

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This is like the bank account number to which you can send funds. With cryptocurrency, control of the private key and ability to use it to perform transactions on the blockchain is the entirety of possession.

Therefore, what separates a good custodian from a bad custodian will rest largely on bitcoin files with sec the bitcoin fund files with sec of private keys and addresses is managed.

Such decisions usually require balancing convenience time required to conduct a transaction and security. As a result, individual investors in cryptocurrency will often take advantage of the ease and simplicity of an online wallet program provided by one of the major cryptocurrency exchanges.

Although cold storage is safe from malicious hackers, it is vulnerable to the traditional threats of physical theft, fire, and loss of human memory.

In addition, paper held in a safe seems counter to the notion bitcoin fund files with sec digital money.

Bitcoin fund files with sec

Ironically, secure storage of a digital asset can often rely on old-fashioned, low-tech methods. To increase the security of the private keys, holders of large amounts of cryptocurrency can take additional measures, such as offline transaction signing and the use bitcoin fund files with sec multiple keys.

Once a transaction is initiated online buy or sell, for examplethe unsigned transaction is then moved to an offline computer containing the private keys.

Bitcoin fund files with sec

The use of multiple keys adds security to crypto transactions by dividing the keys necessary to authorize transactions. For example, a multiple-signature address could create five private keys that are all necessary to unlock one address.

Bitcoin fund files with sec

The qualified custodian could then distribute these keys to designated employees, giving the fifth key to a director. In this approach, the bitcoin fund files with sec key is split into multiple pieces, with a certain number of pieces required to come together to authorize a transaction.

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The use of private keys is illustrated by the Winklevoss Bitcoin Trust exchange-traded fund [75] registration statement filed link the SEC in Challenges bitcoin fund files with sec Applying the Custody Rule The unique way that cryptocurrency is held and stored affects the ability of fund managers to comply with the rule.

Several of these problems stem from the qualified custodian requirement. First, there is a lack of qualified custodians with experience in cryptocurrency.

Second, even if the custodian has developed services in this area, different coins require different storage, and the custodian may not be able to bitcoin fund files with sec every asset a manager wishes to invest in. Challenges with Qualified Custodians Lack of Qualified Custodians One of the primary problems bitcoin fund files with sec fund managers is the lack of qualified custodians and best bitcoin fund files with sec for this asset class.

Although there is a developed and sophisticated network of banks, broker dealers, and other entities that offer qualified custodian services, as of yet, few of these traditional custodians accept cryptocurrency. For example, Kingdom Trust, a non-depository trust company regulated by the South Dakota Division of Banking, can act as a qualified custodian under 4 -2 by both providing safe custody of cryptocurrency and reporting on the assets it holds.

It holds cryptocurrency in a bitcoin fund files with sec facility employing a cold storage method with multi-verification and multi-signature procedures.

Although it is not a qualified custodian, Xapo stores Bitcoin using three underground vaults located on three different continents.

Bitcoin fund files with sec address both the old enemies, fraud and reverses, and the new, technical failures and malicious cyber actors.

There are other companies currently developing qualified custodian services. Different Coins Require Different Storage In addition to the limited number of qualified custodians, the custodians that do exist often limit the types of coins they accept.

At the time of writing, Xapo only handles Bitcoin. Bitcoin transaction size fee of these coins may have technical particularities that require modifications to the operation of the qualified custodian.

Like Bitcoin, Monero uses a ledger to record transactions. Fund managers would thus be put in the difficult position of holding some assets with a qualified custodian while managing others in ways that violate the custody rule.

Some custodians might simply charge more.

Bitcoin fund files with sec

Forks and Airdrops Sometimes owners of cryptocurrency bitcoin fund files with sec gain rights to different coins for free, with or without any action on their part, which presents qualified custodians with additional, bitcoin fund files with sec challenges.

To begin with, the newly awarded coins do not always show up in the wallet software. Instead, the recipient often must take extra steps before they can have access to the private keys.

Bitcoin fund files with sec

After a hard fork of Bitcoin created BitcoinCash on August 1,Coinbase did not support the newly minted currency until January 1, In the event of a hard fork or airdrop, could bitcoin fund files with sec fund manager compel the independent bitcoin fund files with sec to update their system to support and distribute the newly created coin?

Qualified custodians should have legitimate concerns in adopting bitcoin fund files with sec coins because they must consider the safeguards of the storage system. For a manager of a smaller fund not subject to the custody rule, the solution is simple: retake control of the asset prior to the fork or airdrop, and then return it after, only without the unsupported asset.

This odd incentive would also implicate issues of valuation. Though valuation may be less problematic here than in the case bitcoin fund files with sec exchange-traded funds ETFswhich must reach a net asset value on each business day, [] hedge funds must also calculate net asset value to assess investor returns and incentive fees.


With traditional asset classes, fund bitcoin fund files with sec already have an incentive to massage results through discretionary valuation of assets at the end of an bitcoin fund files with sec period. Apart from the issue of whether or not to adopt a token arising from an airdrop or fork, the custodian and hedge fund manager may disagree on whether the new token is a fraudulent offering, which could violate securities laws.

Convenience The need for security also creates problems with bitcoin fund files with sec and timing. Xapo advertises a lengthy hour transfer window to bring digital assets from its vault to a third-party wallet.

For example, if the fund is relying on a prime broker that is not also a qualified custodian, it may have difficulty meeting margin calls within the required timeframe. Secondly, even though hedge funds have discretionary liquidity restrictions, such as side pockets and gates, [] fund managers may struggle with liquidity restrictions in periods of mass sell offs.

This highlights a problem with the current custody rule.

The fund uses Fidelity for custody

In the event of a market crash, more nimble funds holding their own keys would be able bitcoin fund files with sec exit the market, further lowering the market.

Foreseeing this illiquidity, prime brokers may be less willing to extend long-term credit.

Bitcoin fund files with sec

Applicability of The Custody Rule to Particular Assets To further complicate the bitcoin fund files with sec of the bitcoin fund files with sec rule to cryptocurrency hedge funds, there are valid arguments that the rule should not bitcoin fund files with sec to certain types of digital assets.

Therefore, until clear bitcoin fund files with sec are established, savvy legal counsel can draw on each of these points to argue that certain tokens should not be subject to bitcoin fund files with sec rule.

Is the Token Asset a Security? One of the central questions surrounding cryptocurrency regulation is whether the token asset is a security.

Howey Co. For now, fund lawyers can continue to argue that certain tokens are not securities and therefore fall outside of the custody rule. If a fund manager were to store bricks of client cash under their mattress, it would certainly raise all of the concerns that prompted the original adoption of the rule, such as loss, misuse, and misappropriation.

The introduction of cryptocurrency debit cards, [] Click to see more ATMs, [] and payment options at large vendors [] suggests that cryptocurrency can function much like fiat currency.

Bitcoin fund files with sec

Still, cryptocurrencies are functionally different from any bitcoin fund files with sec fiat currency in the world.

They are not regulated by a central authority, they rely on a computer network, and they have not yet reached general acceptance. As discussed above, a sophisticated cryptocurrency fund manager handling their own private keys may have a significant operational advantage over a fund bound by the custody rule.

Even if the SEC determines that cryptocurrencies bitcoin fund files with sec neither client funds nor securities, fund managers without a qualified custodian would still fall afoul of the rule. Funds could avoid this by having investors invest and bitcoin fund files with sec redemptions in only cryptocurrency.

Such a policy would be impracticable for many investors and would require modification of Form D and many other registration documents that denominate minimum investment and offering amounts in US dollars.

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If a token is a security, it can still be exempt from the qualified custodian bitcoin fund files with sec if it falls under the private placement exemption. This exemption applies to privately offered uncertificated securities.

The SAFT is a standard agreement promising to deliver future tokens, modeled after bitcoin fund files with sec agreement used by startups entering angel and seed-round investments.

This would be attractive to fund managers who invest in a diverse range of pre-ICOs and would otherwise struggle finding custodians able to accommodate these yet-to-be-released tokens.

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