Not one for making people feel at ease, the SEC’s Division of Investment Management has indicated that it is not comfortable with investment companies investing in cryptocurrencies and similar products.
In a letter sent to industry groups, the SEC’s IM Director indicated that the Staff had numerous concerns over funds investing in these instruments. The concerns boiled down to 5 categories: valuation, liquidity, custody, arbitrage, potential manipulation and other risks.
The SEC Staff is concerned that funds will not be able to properly value the crypto-assets in question, or reduce them to cash if necessary. Further, the SEC Staff had serious questions concerning if a fund custodian would be able to properly validate the very existence and location of the assets as well ensure that there would be no arbitrage opportunities for insiders that could harm investors. Similarly, the SEC Staff was also concerned about the potential for volatility in the cryptocurrency market as recently witnessed in South Korea.
Additionally, the SEC Staff raised concerned that the cryptocurrency markets lack regulation, and could be subject to market manipulation and potential fraud. These investments also potentially lend themselves to cybersecurity issues such as hacking and the lack of safeguards to protect against these invasions. The SEC Staff also suggested that funds would not be able to sufficient risk disclosures and transparency in their prospectuses to cover their requirements, and, thus, the funds would like the appropriate risk disclosures to their shareholders. Finally, the SEC Staff was concerned that there would not be appropriate suitability determinations by those who market and sell these funds– broker-dealers and registered investment advisers– that would ensure their suitability and fiduciary obligations when recommending cryptocurrency investments to the public.
In sum, this may be the millionth (note: exaggeration) time this year, the SEC has made it known that it does not like cryptocurrency investments. Clearly, the SEC is trying to send a message, therefore, those interested in cryptocurrency markets should beware.