SEC worries about Bitcoin mutual funds, ETFs

As crypto fans continue to await approval for Bitcoin-based ETFs in the U.S., the Securities and Exchange Commission (SEC) is continuing to express its misgivings with retail investment vehicles that focus on crypto.

In a staff statement, the SEC’s division of investment management cautioned investors about buying into mutual funds with Bitcoin exposure, and revealed additional concerns about Bitcoin ETFs.

Stressing that funds with exposure to Bitcoin or Bitcoin futures are highly speculative investments, the SEC said “investors should consider the volatility of Bitcoin and the Bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying Bitcoin market.”

At the same time, the SEC acknowledged that the Bitcoin futures market has matured in recent years — gaining trading volume, consistently producing a reportable price for Bitcoin futures, and not facing the issues with custody that some other forms of crypto-based investing have encountered.

The regulator said it’s aware that some mutual funds believe they can invest in Bitcoin futures without violating federal securities laws. It said it will “closely monitor and assess such mutual funds’ and investment advisers’ ongoing compliance” with investment fund rules and securities laws.

“Investor protection and assessing the ongoing compliance of these funds is a top priority for the staff,” it said.

Additionally, the SEC plans to monitor the impact of mutual funds’ investments in Bitcoin futures on “investor protection, capital formation, and the fairness and efficiency of markets,” it said — promising particular attention to funds’ liquidity, their ability to meet redemption demands, and their valuation of Bitcoin, among other things.

On the question of ETFs venturing into Bitcoin futures, the notice said “investment in the Bitcoin futures market should be pursued only by mutual funds with appropriate strategies that support this type of investment and full disclosure of material risks.”

In particular, it stressed concerns about liquidity if ETFs were trading in Bitcoin futures. “[U]nlike mutual funds, [ETFs] cannot prevent additional investor assets from coming into the ETF if the ETF becomes too large or dominant in the market, or if the liquidity in the market starts to wane,” it said.

Nevertheless, the SEC pledged to consider whether the Bitcoin futures market can accommodate ETFs based on the experience of mutual funds getting into that market.

To that end, it also invited further input from ETFs, “particularly input that focuses on efforts to ensure compliance with [investment fund rules] and promote investor protection.”

“Staff will be transparent about its approach to registered funds’ investment in the Bitcoin futures market, as well as other types of cryptocurrency and digital asset investing,” it said. “Such transparency will be designed to avoid market uncertainty and promote a level playing field for funds, consistent with the protection of investors.”

While Canadian regulators have already approved several ETFs that invest in crypto, the SEC has consistently rejected applications to list crypto-based ETFs amid concerns about the underlying market. In the meantime, a couple of new proposals for Bitcoin ETFs remain under consideration at the SEC.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.