Grayscale’s recent SEC filing shows ZEC, ZEN, and XLM cryptos may be securities

• The asset management firm states that it is classifying these cryptos as securities based on current facts.
• Grayscale’s latest filing also answers an inquiry by an SEC staff on the status of the cryptos mentioned above.

Grayscale Investments LLC has been responding to queries from the US Securities and Exchange Commission (SEC) regarding the company’s “securities policies analysis” of certain tokens in its less famous crypto trusts. The inquiry creates doubt regarding the trusts’ viability during this period when Grayscale is dealing with an abrupt decline in its assets’ value as the crypto winter continues.

The world’s biggest digital asset management firm hinted at the inquiry in its almost unnoticed filings with the SEC in June and two weeks ago. This Grayscale filing contained explanations for trusts with XLM, ZEC, and ZEN tokens. These tokens are the native digital assets for Stellar, Zcash, and Horizen blockchains.

The digital asset manager said the filings are a response to an inquiry from an SEC staff from the department of enforcement and corporate finance. SEC’s enforcement department ensures that crypto industry players do not violate crypto policies. Grayscale hasn’t issued an official statement or responded to media inquiries regarding this matter.

Highlighted portions from May (pink) and June (green) Grayscale filings.

Notice that the June filing provided additional details about the SEC’s inquiries. The SEC’s inquiries cast doubts regarding Grayscale’s list of brokerage crypto trusts. It also reveals the financial regulator is becoming more aggressive in its bid to clamp down on cryptos it considers securities. Hence, such tokens should be subject to us securities law.

Minor but with serious consequences

Grayscale sells its crypto trusts to traditional investors seeking a passive option to invest in digital assets in addition to bonds and stocks. The company manages billions of dollars in crypto assets through these trusts, with its most famous trusts being Grayscale bitcoin trust (GBTC) and Grayscale Ethereum Trust. XLM, ZEC, and ZEN account for a total of $40 million from an estimated $18.7 billion worth of assets managed by Grayscale in its funds and trusts.

Thus, these three represent a small portion of a vast digital asset management empire. Before the crash in the crypto market, these assets’ worth used to be far bigger. As of last November 2021, when the market hit its peak, Grayscale held nearly $60 billion worth of assets. While these trusts are relatively minor, the doubts regarding their security status highlight the importance of Grayscale’s regulatory risks.

The company’s trust business is based on the assumption that these cryptos aren’t securities. Hence, if there is contradictory proof (as contained in the new filings), Grayscale may have to stop offering the affected trusts. Grayscale’s admittance that ZEC, XLM, and ZEN may be securities based on current facts is a huge shift from its previous stance in May and June, where it never made the same admission.

Part of Grayscale’s June (left) and August (right) filings

The differences in the June and August filings also indicate the SEC is taking the securities issues on the tokens mentioned above more seriously. For instance, Grayscale’s June filings state that “SEC staff is yet to provide any guidance regarding the security status of” XLM, ZEC, and ZEN. However, this statement is missing in the august 16 filings. Instead, the asset manager stated in this recent filing that it had received a memo on the security status of these tokens. However, the filings didn’t reveal more details about this memo.