May 20, 2021
The SEC’s Bitcoin Futures Warning for Mutual Funds
Last week, the SEC released a statement pertaining to funds investing in Bitcoin futures. Market participants have pushed for cryptocurrency ETFs in recent years, with no sign the SEC will approve these products in the near future. Instead, the Commission continues to focus on certain Investment Company Act-compliant mutual funds, which it states are currently the only appropriate fund type to invest in Bitcoin futures.
To ensure compliance with the Investment Company Act, the SEC’s Division of Investment Management and the Division of Enforcement are looking closely at registered funds with exposure to Bitcoin futures. The SEC is chiefly concerned with the risks strategies containing cryptocurrencies pose to capital formation efforts, investor protections, and upholding market fairness.
This new guidance statement is another regulatory obstacle in the way of cryptocurrency ETFs gaining traction with the SEC anytime soon. The last time the Commission commented on Bitcoin funds was in a 2018 Staff Letter. The communication outlined the high regulatory risks of crypto ETFs and signaled a reluctance to approve these funds for the foreseeable future.
The SEC’s statement reminds investors to understand risks of cryptocurrency products before any transactions are made. For example, critiques of Bitcoin tweeted by Tesla CEO, Elon Musk, sent the cryptocurrency for a nearly 30% drop in recent days, demonstrating the volatility of these securities. Funds’ risk disclosures are important tools for investors and advisory firms doing diligence on these products and should be as comprehensive as possible.
Regulators are continuing to grapple with the complexities of cryptocurrencies, especially Bitcoin. With that in mind, your firm should make every effort to understand the risks of these securities when advising mutual fund clients. Because these products continue to carry special compliance risks and are not broadly regulated by the SEC at this time, exposure to Bitcoin futures or other crypto products could make your fund clients more likely to face regulatory scrutiny.
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