On May 11, 2021, the SEC issued a statement on funds registered under the Investment Company Act investing in the Bitcoin Futures Market. In its statement, the SEC’s Division of Investment Management staff strongly encouraged any investor interested in investing in a mutual fund with exposure to the Bitcoin futures market to carefully consider the risk disclosure of the fund, the investor’s own risk tolerance, and the possibility, as with all investing, of investor loss. The SEC wants investors to understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment. Accordingly, 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 Bitcoin market.
Shortly after Bitcoin futures began trading in December of 2017, the SEC staff issued a letter on Engaging on Fund Innovation and Cryptocurrency Related Holdings, wherein it identified areas of questions related to funds investing in digital assets, including cryptocurrencies or cryptocurrency-related investments. It was noted that, in response, a number of registered funds have focused on cash-settled Bitcoin futures, traded on an exchange regulated by the U.S. Commodity Futures Trading Commission, believing it to be a potential method of gaining cryptocurrency exposure while addressing some of the concerns raised in the Cryptocurrency Holdings Letter. The Bitcoin futures market has developed since then, with increased trading volumes and open-interest positions.
The SEC understands that some mutual funds are investing in Bitcoin futures and that these funds believe they can do so consistent with the requirements of the Investment Company Act and its rules and other federal securities laws. However, as noted in its current statement, the SEC, along with its Division of Examinations, will closely monitor and assess such mutual funds’ and investment advisers’ ongoing compliance with the Investment Company Act and the rules thereunder and the other federal securities laws. As part of this monitoring, the SEC intends to:
- Analyze the liquidity and depth of the Bitcoin futures market and consider whether it is properly supporting mutual fund investment in Bitcoin futures including the ability to meet daily redemption demands, as well as the efficacy of mutual funds’ derivatives risk management
- Consider the mutual funds’ liquidity classification of any position in the Bitcoin futures market and the basis for such classification and also consider the overall construction of a fund’s liquidity risk management program
- Monitor the funds’ valuations of holdings in the Bitcoin futures market and consider the impact of participation in the Bitcoin futures market on valuations, as well as the impact on valuation of any disruptions in the underlying Bitcoin markets
- Assess the ongoing impact of the potential for fraud or manipulation in the underlying Bitcoin markets
- Consider whether the Bitcoin futures market could accommodate ETFs, which, unlike mutual funds, 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
As noted in the statement, for open-end funds, the SEC believes at this time that investment in the Bitcoin futures market should be undertaken only by mutual funds with suitable strategies that support such investments and full disclosure of material risks. Since closed-end funds do not provide for daily redemption of their shares, they do not present the same types of liquidity challenges as open-end funds. Accordingly, the SEC encourages any closed-end fund that seeks to invest in the Bitcoin futures market to consult with the SEC’s staff, prior to filing a registration statement, about the fund’s proposed investment, anticipated compliance with the Investment Company Act and its rules, and how the fund would provide for appropriate investor protection.
The SEC’s monitoring of registered funds’ investment in the Bitcoin futures market, including other types of cryptocurrency and digital asset investing, will be designed to avoid market uncertainty, promote a level playing field for registered funds, and protect investors.