SEC Opens Door to Registered Closed-End Funds Investing in Crypto Futures
The staff of the SEC’s Division of Investment Management raised liquidity concerns about open-end funds and ETFs investing in Bitcoin futures but indicated that closed-end funds do not present the same risks.
The staff cited volatility, the lack of regulation, and the potential for market manipulation as creating both valuation and liquidity concerns for open-end mutual funds and ETFs. The staff will “closely monitor” whether such funds can satisfy seven-day liquidity and daily valuation requirements as well as the Investment Company Act’s new liquidity risk management and derivatives risk management rules. The Division staff also warned investors away from investing in such funds because of their highly speculative nature. As the staff noted, many funds have sought to seek exposure to Bitcoin through the futures market because of regulatory challenges with direct investing in the cryptocurrency. At the same time, the staff shows more willingness to accept cryptocurrency exposure through closed-end funds because such funds do not require daily redemption. The staff “encourages any closed-end fund that seeks to invest in the Bitcoin futures market to consult with the 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.”
It appears that the SEC will allow closed-end funds to test-drive the Bitcoin futures market before allowing open-end funds and ETFs to move forward. In classic regulatory double-speak, this apparently negative Staff Statement may actually mean that the regulator is ready to approve a registered fund that invests in cryptocurrency. Presumably, if a closed-end fund can solve the custody issues, direct investing in cryptocurrency shouldn’t be far behind.
Read Staff Statement here.