IM Staff Issues Statement on Investing in the Bitcoin Futures Market

The staff of Division of Investment Management cautioned investors 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 staff’s warnings come as more asset managers diversify into Bitcoin-linked products like cash-settled bitcoin futures and Grayscale’s Bitcoin Trust, according to a report from Coindesk. The IM Staff statement acknowledged that some mutual funds are investing or seek to invest in Bitcoin futures and believe they can do so consistent with the substantive requirements of the 1940 Act and other federal securities laws. However, the staff warned that, along with the Division of Examinations, IM will closely monitor and assess such funds’ and advisers’ ongoing compliance with the securities laws, the impact of mutual funds’ investments in Bitcoin futures on investor protection, capital formation, and the fairness and efficiency of markets.  The statement outlined several areas staff will analyze, including:

• Mutual funds’ ability to liquidate Bitcoin futures positions as necessary to meet daily redemption demands, as well as the efficacy of mutual funds’ derivatives risk management and the extent of any leverage obtained through derivatives.
• Funds’ valuations of holdings in the Bitcoin futures market and the impact of mutual fund participation in the Bitcoin futures market on valuations in that market, as well as the impact on valuation of any disruptions in the underlying Bitcoin markets.
• Funds’ compliance with the open-end fund liquidity rule,mutual funds’ liquidity classification of any position in the Bitcoin futures market and the basis for such classification and also the overall construction of a fund’s liquidity risk management program, including consideration of the liquidity of a fund’s strategy and portfolio investments during both normal and reasonably foreseeable stressed conditions, whether the investment strategy is appropriate for an open-end fund, and the extent to which the strategy involves a relatively concentrated portfolio or large positions in particular investments.

The staff wrote that investment in the Bitcoin futures market should be pursued only by mutual funds with appropriate strategies that support this type of investment and full disclosure of material risks. The statement also noted that because 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. The staff encouraged any closed-end fund that seeks to invest in the Bitcoin futures market to consult with the staff prior to filing a registration statement. The staff also said it would consider whether the Bitcoin futures market could accommodate ETFs and asked the industry to provide input to the staff on ETF-specific issues.