On May 11, the Securities Exchange Commission’s (SEC) Division of Investment Management (IM) staff issued a Public Statement (Statement) strongly encouraging any investor interested in investing in mutual funds exposed to the Bitcoin futures market to carefully consider the risks involved with such investments. IM staff emphasized, among other things, that Bitcoin is a highly speculative investment, and, therefore, investors should consider the volatility of Bitcoin and the Bitcoin futures market and the lack of regulation and potential fraud or manipulation in the underlying Bitcoin market prior to making an investment.
The Statement also summarized IM staff’s prior guidance from its Engaging on Fund Innovation and Cryptocurrency Related Holdings Letter from January 2018 (Letter). In the Letter, IM staff highlighted five areas of questions implicated by funds registered under the Investment Company Act of 1940 (ICA) potentially investing in digital assets including cryptocurrencies or cryptocurrency-related investments: valuation, liquidity, custody, arbitrage mechanisms for exchange traded funds (ETFs), and potential manipulation and other potential risks of cryptocurrency-related markets. The Statement also discussed the development of the Bitcoin futures market since it issued the Letter, recognizing that trading volumes and open-interests positions have increased. Additionally, the Statement acknowledged that the Bitcoin futures market has not presented the custody challenges associated with some cryptocurrency-based investing because the futures are cash-settled.
IM staff also emphasized investor protection and assessing ongoing compliance of mutual funds seeking to invest in Bitcoin futures will remain a top priority. IM staff plan to monitor the impact of mutual funds’ investments in Bitcoin futures on investor protection, capital formation and the fairness and efficiency of markets. IM staff expect this monitoring will include, among other things, analyzing the liquidity and depth of the Bitcoin futures market, analyzing mutual funds’ ability to liquidate Bitcoin futures positions to meet daily redemption demands, monitoring funds’ valuations of holdings in the Bitcoin futures market, considering mutual funds’ liquidity classification of any position in the Bitcoin futures market including the basis for those classifications, assessing the ongoing impact of the potential for fraud or manipulation in the underlying Bitcoin markets, and considering whether the Bitcoin futures market could accommodate ETFs.
IM staff concluded by emphasizing that only mutual funds with appropriate strategies supporting this type of investment and full disclosure of material risks should invest in the Bitcoin futures market at this time. The Statement represents IM staff views and is not a rule, regulation or statement of the SEC.