SEC staff said bitcoin was not a security in Cipher fund review

On October 1, 2019, staff in the U.S. Securities and Exchange Commission’s Division of Investment Management told Cipher Technologies Management that bitcoin was not a security under the analysis the staff applied. The conclusion blocked Cipher Technologies Bitcoin Fund’s chosen route to registration: because the proposed closed-end interval fund planned to put substantially all its assets into bitcoin, staff said it did not qualify as an “investment company” under the Investment Company Act of 1940 and had filed on the wrong form.

The letter was narrow but consequential. It put an SEC staff position on bitcoin’s status into a formal fund-review record while also showing that a non-security classification did not amount to regulatory approval for a bitcoin investment product. Staff declined to conduct further review of Cipher in its existing form and separately maintained that the proposal had not resolved valuation, custody and potential market-manipulation concerns.

Why Cipher’s theory failed

Cipher had filed Form N-2 on May 13, 2019, seeking to register a closed-end interval fund. Its strategy contemplated investing substantially all assets in bitcoin, alongside possible bitcoin lending, covered-call writing and bitcoin futures. In a May 28 letter, SEC staff first raised a threshold problem: the Investment Company Act definition relevant to Cipher concerns an issuer primarily engaged in investing, reinvesting or trading in securities. Staff asked Cipher to explain how a vehicle centered on bitcoin fit that definition.

Cipher’s June 14 response took an unusual position for a bitcoin sponsor. It argued that bitcoin itself was a security under the federal securities laws and therefore could support the fund’s Investment Company Act registration. Cipher reasoned through the investment-contract test associated with the Supreme Court’s 1946 Howey decision and also argued for a broad reading of “security” under the 1940 Act.

After a September 27 meeting and Cipher’s September 11 amended filing, SEC staff rejected that analysis on October 1. Staff said current bitcoin purchasers were not relying on the essential managerial and entrepreneurial efforts of others to produce a profit. That missing dependence mattered under the staff’s Howey analysis and its April 2019 digital-asset framework.

A boundary, not a blanket exemption

The verified conclusion belongs to SEC staff, not to a Commission vote or a federal court judgment. The April framework itself said it represented staff views, was nonbinding and was neither a rule nor a Commission statement. The October 1 letter therefore should not be enlarged into a permanent legal ruling for every transaction involving bitcoin, much less for every digital asset.

Staff also explained the tension inside Cipher’s argument. If bitcoin were the security Cipher claimed, the letter said, bitcoin would be an unregistered, publicly offered security and the proposed fund could potentially become an underwriter of bitcoin. In other words, classifying the underlying asset as a security would not simply unlock the regulated-fund structure; it would create additional registration problems.

The event-day record also did not say that a share issued by a bitcoin-holding vehicle could never be a security. It addressed whether Cipher’s proposed portfolio made Cipher an investment company under the 1940 Act as structured. The legal character of a fund share and the legal character of the asset held by the fund are separate questions.

Investor-protection questions remained open

SEC staff’s refusal to continue review rested on more than classification. The October 1 letter said Cipher had not satisfactorily addressed significant issues involving valuation, custody and possible manipulation in the bitcoin market, concerns staff had raised before the filing. Staff invited engagement if Cipher wanted to consider another structure and respond more fully.

That distinction was the institutional significance of October 1, 2019: SEC staff supplied unusually direct written confirmation of its bitcoin analysis, but it did not clear Cipher’s product. No market-price inference is made here. The cited record contains no controlled evidence that the letter caused a bitcoin price move, and cryptocurrency trading has no single official daily close across venues.