Davis Polk partner and ESG practice head Joe Hall discussed crypto “dust” and its prevalence in bitcoin exchange traded funds with the Financial Times. Dust refers to digital assets that are embedded in cryptocurrency transactions as byproducts.

Several exchange traded funds that invest in bitcoin have received “dust” in the form of non-bitcoin tokens that they did not buy and are unable to sell. Bitcoin ETF managers would need regulatory approval to sell the bonus virtual assets in order to comply with tax regulations.

“These are just weird crypto artifacts that legacy SEC structures and legacy tax structures were not designed to accommodate,” Joe explained.

If bitcoin ETFs were to sell the assets without approval, it could imperil their legal status and “kill the product,” Joe noted.  

Vomiting frogs and other ‘dust’ prove vexing for US bitcoin ETFs,” Financial Times (April 29, 2024) (subscription required)