SEC issues Staff Statement on investments in the bitcoin futures market

On May 11, the Security and Exchange Commission’s Division of Investment Management announced that it and the SEC Divisions of Examinations and Economic and Risk Analysis will “closely monitor” the impact of mutual fund investments in bitcoin futures on “investor protection, capital formation and the fairness and efficiency of markets.”

This Staff Statement on Funds Registered Under the Investment Company Act Investing in the Bitcoin Futures Market made clear that assessing compliance with the Investment Company Act and its rules and regulations in this area is a “top priority” for the SEC staff.  It also cautioned investors to carefully evaluate the risks of investing in funds with such exposure, particularly in light of the volatility of the bitcoin and bitcoin futures markets and the lack of regulation and the potential for fraud in those markets.

The Statement signals that the SEC will continue to proceed cautiously in approving any proposed bitcoin ETFs and that funds and advisers should expect increased scrutiny.

The Statement identified specific areas of SEC focus, including:

• the liquidity and depth of the bitcoin futures market
• the ability of a fund to liquidate bitcoin future positions
• risk management, valuation of holdings
• compliance with the open-end fund liquidity rule and how funds classify the liquidity of positions in the bitcoin futures market
• the potential for fraud and manipulation and
• potential issues with ETFs in the bitcoin futures market – in particular, concerns that an ETF cannot close to new investors, and could become too large, or if liquidity in the market starts to decrease.

The Statement suggests that open-end funds face greater issues than closed-end funds, since the latter do not allow for daily redemption of shares so that they do not face the same liquidity issues as open-end funds. Nonetheless, the Statement encourages closed-end funds seeking to invest in the bitcoin futures markets to consult with the staff prior to fling a registration statement.

In sum, the Statement confirms that the SEC is not retreating from its cautious approach to regulation of digital assets in the securities markets.