In this issue

  1. SEC to review Grayscale’s ETF application
  2. NFTs: Next on the SEC’s hit list?
  3. Asia’s richest man eyes digital assets

From the Editor’s Desk

Dear Reader,

Everyone loves an underdog. And in crypto, an underdog can be any entity in the industry, so long as it puts up a fight against the biggest bully around, a.k.a. the United States Securities and Exchange Commission (SEC).

The SEC has in the past year run amok with a chainsaw in its zeal to cut the industry down to size following the FTX debacle and other crypto catastrophes. So even a player as big as Grayscale – the world’s largest Bitcoin fund – gets to star in the role of the little-guy hero, prevailing in court against the overmighty regulator’s rejection of its bid to offer a Bitcoin exchange-traded fund.

It didn’t have to come to this – and indeed, the SEC may yet appeal against Grayscale’s legal victory – but the company’s court win paves the way for it and other Bitcoin ETF candidates to succeed in offering fund products.

Yet popping the champagne would be entirely premature. Not only are the pending ETF applications still subject to SEC approval, but also, as essentially TradFi instruments, ETFs – even those related to crypto – are a little underwhelming when it comes to the transformative potential of digital assets.

Grayscale’s win nevertheless represents progress, and for that we should be grateful. Progress is also evident from developments in India, where the country’s biggest conglomerate has announced a foray into digital assets, and where the government, currently presiding over the G20, has got with the program and has called for the group to craft global crypto rules.

That’s a welcome change from the bad old days – not even that long ago – when Indian politicians were calling for a ban on crypto and the country’s central bank was doing its best to throttle the industry.

Both developments suggest that the backlash against crypto fueled by the likes of FTX and Terra-Luna may be waning. And both developments convey a clear message: Authorities can’t banish crypto, so they’d better ‘fess up to that and find a way to regulate it.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief

1. Grayscale’s Bitcoin ETF dream revived

Grayscale SEC
This pivotal ruling is not only a beacon of optimism for Grayscale but may also pave the way for other financial heavyweights, such as BlackRock and Fidelity, waiting for the SEC’s decision on their own spot Bitcoin ETF applications. Image: Grayscale/SEC

A U.S. Court of Appeals has sided with Grayscale in challenging the Securities and Exchange Commission’s (SEC) rejection of the firm’s Bitcoin exchange-traded fund (ETF) application, marking a victory for the world’s largest digital currency asset manager that could impact multiple pending Bitcoin ETF applications. 

  • In June 2022, the SEC rejected Grayscale’s application to convert its Bitcoin trust product (GBTC) into a spot Bitcoin ETF. Grayscale then sued the SEC to demand a review of the application.
  • In Tuesday’s court decision, the District of Columbia Court of Appeals said “the denial of Grayscale’s (Bitcoin ETF) proposal was arbitrary and capricious” and granted Grayscale’s petition, meaning the SEC now has to review the company’s application it rejected earlier.
  • The court ruling is a “historic milestone for American investors, the Bitcoin ecosystem, and all those who have been advocating for Bitcoin exposure through the added protections of the ETF wrapper,” Grayscale Chief Executive Officer Michael Sonnenshein said in a Tuesday announcement.
  • Following the court’s decision, Bitcoin price surged from around US$26,000 on Tuesday evening in Asia to about US$28,000 on Wednesday morning, the biggest daily gain for months, according to data from CoinMarketCap.
  • “Undoubtedly this development is a strong positive signal for the market,” Matteo Greco, research analyst at Canada-based digital asset investment firm Fineqia International, said in an emailed comment. “However, final decisions on when and if Grayscale will be able to list its product as an ETF are yet to be made.”

Forkast.Insights | What does it mean?

The SEC, historically critical of the cryptocurrency industry, holds significant influence over the approval of a much-anticipated financial instrument: a spot Bitcoin ETF. 

Despite a challenging summer for cryptocurrency prices (and the global economy), the industry witnessed some legal success. San Francisco-based Ripple Labs secured a notable partial victory against the regulator, with the court ruling that the public sales of the XRP cryptocurrency did not violate securities regulations. 

Grayscale’s legal win further punctuated these positive developments, though it doesn’t automatically ensure the approval of its GBTC fund as the first U.S. spot Bitcoin ETF. However, the decision has enhanced its prospects. 

The SEC’s forthcoming verdicts on numerous Bitcoin ETF applications, including submissions from industry giants BlackRock and Fidelity, are eagerly awaited. The pioneer in launching a U.S. spot Bitcoin ETF will capture a crucial market edge, but the first mover is yet to be identified. 

Market watchers largely agree on the potential impact of such a financial product on Bitcoin prices, as evidenced by the notable price surge following Grayscale’s victory. 

2. SEC’s war on NFTs

SEC’s US$6.1 million fine on Impact Theory may signal a pivotal shift in NFT regulation. Image: AI-generated via Midjourney

The first shot in the SEC’s war against NFTs has been fired, beginning with charges against Web3 media studio Impact Theory for selling unregistered securities. Impact Theory quickly settled, but many are convinced that this is just the start of a much more calculated attack on NFTs by the U.S. government.

  • Impact Theory, launched in October 2021, and offered three tiers of NFTs ranging from Legendary, Heroic, and Relentless. Each tier of NFTs offers a different level of access, discounts, and perks across projects in their ecosystem.
  • A US$6.1 million fine has been levied against Impact Theory in “disgorgement, prejudgement interest, and a civil penalty.” The company is also required to “burn” all KeyNFTs in its possession, publish a notice on its website, revise its smart contract, remove royalties on any marketplace, and offer a refund to all primary sale buyers of its NFTs.
  • Each NFT used the ERC-1155 token standard, making them semi-fungible with non-unique art and numbering across the tiers. About US$30 million was raised in Impact Theory’s primary sale, and its NFTs saw over US$39 million in sales on secondary markets. The highest-priced secondary sale was Founder’s Key #217, which sold for US$17,460.05 on Oct. 13, 2021
  • The SEC said that Impact Theory planned to use funds raised from its NFT sale to develop products, bring on more teams, and create more projects.
  • Key facts in the SEC’s case against Impact Theory were early statements that the company was “trying to build the next Disney,” had a goal of delivering “tremendous value to Founders Key Purchasers,” and that NFTs will “capture economic value from the growth of the company that they support,” among over a dozen direct comments about future NFT value and project plans.

Forkast.Insights | What does it mean?

It should be no surprise that the SEC would eventually turn its attention towards NFTs with a goal of disrupting or diminishing the industry. We’ve seen the SEC’s unwillingness to provide clarity into crypto, and more accurately, seemed to be actively working against the industry. Since NFTs entered the mainstream conversation and markets in 2021, the SEC’s public statements on the NFTs’ usage made it clear that many were in the crosshairs for being unregistered securities.

A security is a financial asset that can be sold or traded in a financial market and constitutes an investment of money, made in a business, with the expectation of profit to come through the efforts of someone else other than the investor. Impact Theory seems to check quite a few, if not all, of these boxes. The problem for the rest of the NFT ecosystem is that most projects operate almost exactly the same. 

For years, collectors have been wooed by the promise of a new way for creators to build, and a new way for entrepreneurs to raise funds. One that would be free from the needless red tape that the traditional world of business and finance offered. Along the way, the NFT industry, both on the creator and collector side, implored the SEC for guidance and a framework to build with, and not once did that arrive. Now we have tens of thousands of NFT projects who, most with the best intentions, created NFTs using this new technology to build while providing both abstract and financial value to collectors. 

Tom Bilyeu, the co-founder of Impact Theory, stated that the level of aggression from the SEC is high, and that they’re definitely looking at many other projects right now. I believe you must now assume that just about every major NFT project has an active SEC investigation in progress, one that has probably been going on for most of the year. 

Profile picture projects that offered rewarding experiences for buyers of their NFTs, spoke about driving value to holders, used NFT sales to build their business, and probably most projects who developed a crypto currency are set to be impacted by the SEC’s charges the most. On the flip side, pure collectibles and art should feel no impact. In fact, these are the assets that will thrive.

Already, the NFT market, like many projects and traders, is feeling the pressure. The Forkast 500 NFT Index reflects a decline in the NFT market, losing 1.87% of its value since the SEC’s charges against Impact Theory were announced on Monday. This is likely just the tip of the iceberg. Collectors may begin selling their NFTs before any potential charges because the penalty for offering unregistered securities will be a death sentence for most projects.

Use critical thinking, and ask yourself these questions about your favorite NFT project – did this projects offer an NFT (a financial asset), that can be sold or traded in a financial market (OpenSea), and is an investment of money (crypto), made in a business (NFT project), with the expectation of profit to come through the efforts of someone else other than the investor (“WAGMI” or “to the moon!”).

3. Taking a chance

Asia richest man blockchain
Mukesh Ambani, the richest person in Asia and chairman of India’s Reliance, has long been a supporter of blockchain technology. Image: Canva/Forbes

Reliance Industries – the largest private company in India – is exploring blockchain technologies and central bank digital currencies (CBDC), said Reliance’s chairman and managing director Mukesh Ambani who is also the richest person in Asia.

  • Jio Financial Services (JFS) – a newly-launched financial branch of Reliance – “will not just compete with current industry benchmarks but also explore pathbreaking features such as blockchain-based platforms and CBDC,” said Ambani on Monday at Reliance’s annual shareholders’ meeting, according to CNBC.
  • JFS marks Aliance’s entrance into the digital financial products space, which in July announced a partnership with the world’s leading asset manager BlackRock to form Jio BlackRock – a 50:50 joint venture where both are targeting an initial investment of US$150 million.
  • In February, the retail branch of Reliance started to accept Digital Rupee payments, making it the largest Indian firm to adopt the nation’s retail CBDC that launched last December and is now piloted in over a dozen cities.
  • Ambani has long shown interest in the blockchain space, saying in December 2021 that blockchain is a technology he believes in and has the potential to redefine the financial industry, according to local Indian media Business Standard.
  • Meanwhile, at the G20 conference on Tuesday, India Prime Minister Narendra Modi highlighted the need for an international regulatory framework to regulate cryptocurrencies, after the country released a roadmap for global crypto regulation in early August.

Forkast.Insights | What does it mean?

When Reliance Industries – India’s most valuable company by market capitalization – ventures into any new sector, industry watchers ought to sit up and pay attention. When the corporate behemoth makes a foray into digital assets, they’re probably not wrong to start betting long on the future of the asset class.

Mukesh Ambani, the older of the two sons of Reliance Industries’ founder, has found easy fame at the helm of the company, and almost unparalleled influence in Indian political life. He’s described as someone of whom government ministers are wary due to his sheer power, and whose company operates as practically a state within a state.

From this perspective, the timing of Reliance’s digital assets and blockchain announcement – just a day before rightwing Indian Prime Minister Narendra Modi called on the G20 to get to work on a global regulatory framework for cryptocurrencies – makes perfect sense, highlighting the close relationship between the businessman and the politician, both Gujaratis who have ties dating back to Modi’s time as chief minister of the state.

Despite the way that may look, at least India appears to have gotten the memo, recognizing that crypto is here to stay, and, given this, that it ought to do something about regulating it.

Compare that acceptance – however reluctant it may have been – with the attitude of Asia’s other big power, which has taken a decidedly dirigiste stance on crypto to reach the blunt conclusion that the only form of regulation that ought to apply to it is an outright ban. To bastardize a phrase, Beijing’s only tool seems to be a hammer, so it’s hardly surprising that it sees every challenge as a nail.

However Reliance’s interest in digital assets shapes up, and however much the company may have enjoyed political favor, the latest moves in India’s digital asset space are surely better than that.

For new industries such as this one, investment plus regulation can often equal liftoff. So despite India’s on-off approach to crypto, the country appears now to have a greater opportunity to position itself  at the leading edge of the sector’s development rather than being left on the launchpad.