Bitcoin | Staff Statement on Funds Registered Under the Investment Company Act Investing in the Bitcoin Futures Market

Investment Management (“IM”) Division staff strongly encourages any investor interested in investing in a mutual fund with exposure to the bitcoin futures market, as explained below, to carefully consider disclosure of risks of the fund, the investor himself. risk tolerance and the possibility, as with all investments, of loss to the investor.[1] Among other things, investors must understand that bitcoin, including exposure through the bitcoin futures market, is a highly speculative investment. As such, 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 underlying bitcoin market. As with any fund investment, investors should focus on the level of risk they are taking and the level of risk they are comfortable with before making an investment.

In January 2018, im staff issued a letter on participation in fund innovation and holdings related to cryptocurrencies (“cryptocurrency holdings letter”).[2] In that letter, the IM staff identified five substantive areas of questions involved by funds registered under the Investment Company Act of 1940 (“Investment Company Act”) (“registered funds”) potentially investing in digital assets, including cryptocurrencies or investments related to cryptocurrencies. The areas identified related to substantive requirements related to valuation, liquidity, custody, arbitration mechanisms for exchange-traded funds (“ETFs”), as well as potential manipulation and other risks associated with cryptocurrency-related markets.

Reading: Sec said to allow bitcoin futures

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IM staff appreciates the public comments provided in response to the Cryptocurrency Tenure Chart investment companies and their rules. . By providing information, a series of registered funds have focused especially on Bitcoin futures liquidated in cash, negotiated in a bag regulated by the USA. uu. Basic Products Trade Commission (“CFTC”) (“Bitcoin Futures”), believing that it is a potential method to obtain exposure to cryptocurrencies while some of the questions raised in the cryptocurrency holdings are addressed. /p>

im staff issued the cryptocurrency holding letter shortly after bitcoin futures began trading in december 2017. the cryptocurrency holding letter acknowledged that the bitcoin futures market, at the time, was in a fledgling state with limited trading volume. the bitcoin futures market has since developed, with higher trading volumes and open interest positions.[4] Furthermore, the bitcoin futures market has consistently produced a must-report price for bitcoin futures. The bitcoin futures market has also not presented the custody challenges associated with some cryptocurrency-based investments because futures are cash-settled.[5] the commission also adopted a new exempt rule relating to the funds’ use of derivatives, the terms of which generally include limits on derivative leverage risk and the adoption and implementation of a derivative risk management program.[6]

im staff understands that some mutual funds are investing or seeking to invest in bitcoin futures and that these funds believe they can do so in accordance with the substantive requirements of the Mutual Funds Act and its rules and other applicable federal laws. values. IM staff, in coordination with the Examination Division staff, will closely monitor and evaluate the continued compliance by such mutual funds and investment advisers with the Investment Company Act and its rules and other applicable federal laws. values. Investor protection and ongoing compliance assessment of these funds is a top priority for staff.

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In addition, IM staff, in coordination with staff from the Risk and Economic Analysis Division and Examination Division, will closely monitor the impact of mutual fund investments in bitcoin futures on the protection of investors, capital formation, and the fairness and efficiency of markets. As part of this monitoring, the staff, among other things, expect

  • Analyze the liquidity and depth (e.g., number of participants) of the bitcoin futures market and consider whether it is adequately supporting mutual fund investment in bitcoin futures, particularly as they enter the market additional mutual fund assets, given regulatory requirements. related to mutual funds’ liquidity;
  • analyze the ability of mutual funds to liquidate bitcoin futures positions as needed to meet daily redemption demands, as well as the effectiveness of managing derivative risks of the mutual funds and the extent of any leverage obtained through derivatives;
  • monitor the funds’ valuations of holdings in the bitcoin futures market and consider the impact of the participation of mutual funds 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;
  • as part of the funds’ compliance with the rule of open-end fund liquidity, consider the mutual fund liquidity rating of any position in the bitcoin futures market and the basis for that rating and also consider the construction overview of a fund’s liquidity risk management program, including consideration of the liquidity of a fund’s strategy and portfolio investments during normal and reasonably foreseeable stressed conditions, whether the investment strategy is appropriate for a open-ended fund, and the extent to which the strategy involves a relatively concentrated portfolio or large positions in particular investments;[7]
  • assess the ongoing impact of the potential for fraud or manipulation on the underlying markets of bitcoin and its possible influence on the bitcoin futures market;[8] and
  • consider whether, in light of the experience of mutual funds that invest in the bitcoin futures market, the bitcoin futures market It could accommodate ETFs, which, unlike mutual funds, can’t prevent investors’ additional assets from pouring into the ETF if the ETF becomes too large or dominant in the ma market, or if the l Equity in the market begins to decline.

Among open-ended funds, im’s staff believes at this time that investment in the bitcoin futures market should be pursued only by mutual funds with appropriate strategies supporting this type of investment and full disclosure of material risks. The staff welcomes further input from ETFs and other market participants, particularly input that focuses on efforts to ensure investment company compliance with the law and its rules and promote investor protection. Because closed-end funds don’t provide daily redemption of your shares, they don’t present the same types of liquidity challenges as open-ended funds. therefore, the staff encourages any closed-end fund seeking to invest in the bitcoin futures market to consult with the staff, prior to filing a registration statement, about the fund’s proposed investment, advance compliance with the law of the investment company and its rules, and how the fund would provide adequate protection to investors.

im staff will be transparent about its approach to investing registered funds in the bitcoin futures market, as well as other types of investment in cryptocurrencies and digital assets. such transparency will be designed to avoid market uncertainty and promote a level playing field for the funds, consistent with investor protection.

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