Updated with correction
Key players in the cryptocurrency market are leaning toward added regulatory scrutiny to head off potential investor concerns.
Fidelity Digital Assets, launched in late 2018 by Fidelity Investments as the first major firm in institutional asset servicing to offer cryptocurrency custody and trade execution operations, was granted a charter in October from the New York State Department of Financial Services to operate as a limited liability trust company.
Obtaining the charter allows more potential institutional clients to do business with Fidelity Digital Assets, said Tom Jessop, its New York-based president. "We think it's a high bar and a signal to the market that we meet fairly stringent regulatory requirements, and that's important to us," he said. "We want our clients to know not just what we say about our business, but that we are regulated and have certain regulatory obligations that over time we need to maintain."
New York-based Grayscale Investments LLC — which touts itself as the world's largest digital asset manager with $2.6 billion AUM and offers 10 cryptocurrency investment products to institutional and accredited investors, four of which trade publicly and are available to all investors — had a similar thought when it applied for its Grayscale Bitcoin Trust to become a Securities and Exchange Commission reporting company, a designation it officially received on Jan. 21.
Grayscale Bitcoin Trust, the first digital currency investment vehicle to attain the status of an SEC reporting company, will now file quarterly and annual reports as well as audited financial statements such as 10-Qs and 10-Ks.
"We want to be signaling to folks that if you are demonstrating and consistently have a track record of operational excellence and the ability to create products with the appropriate level of disclosure and reporting, that there are very viable ways to work within the existing regulatory frameworks, despite the fact that digital currencies and digital assets are new," said Michael Sonnenshein, managing director of Grayscale in New York.
The process took roughly a year to complete, Mr. Sonnenshein said. The voluntary filing became public in November and after some SEC questions were answered, took effect last month.
Grayscale Bitcoin Trust is the firm's largest investment vehicle, with $2.4 billion in assets as of Jan. 17. A more stringent reporting system "is what investors are expecting of a product of this size and scope," Mr. Sonnenshein added.
Craig Salm, director of legal at Grayscale, said many institutional investors are not able to even consider an instrument that isn't reporting to the SEC, so this development should widen the trust's investor base.
"Because many institutional investors do not have the legal or operational wherewithal to hold the assets directly, they must use instruments or third-party custodians for almost everything that they invest in," Mr. Sonnenshein said. "Now that there is a bitcoin product that is SEC reporting and has that (higher) level of disclosure, they may now be able to consider it."
Bitwise Asset Management Inc., a San Francisco cryptoasset manager, like several other digital asset firms has tried to register a bitcoin exchange-traded fund with the SEC but thus far has come up short. In October, the SEC rejected Bitwise's proposal because it did not meet the legal requirements to prevent fraud or market manipulation, the SEC said. To date, no bitcoin ETF has been approved.
Matthew Hougan, vice president and global head of research at Bitwise, said his firm applied for the ETF to access financial advisers in wealth management. Bitwise surveyed roughly 400 advisers before filing the application in early 2019 and found that two-thirds would prefer to buy cryptoassets through an ETF, Mr. Hougan said.
Mr. Hougan said Bitwise is reviewing the SEC response to its application, which it officially withdrew in January, and will reapply "as soon as possible." He declined to provide Bitwise's assets under management.