SEC to Scrutinize Funds Invested in Bitcoin Futures

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Bitcoin is a decentralized virtual currency, which allows users to pay for goods and services online without the need for banks or government agencies to issue or redeem such currency. Bitcoin surged in value in 2017, peaking at nearly $20,000 per unit in December. The cryptocurrency has since lost more than half its value, but continues to be discussed as an investment option. In the past, the Securities and Exchange Commission has warned investors about the risks associated with virtual currencies, but this may be a sign that the SEC is taking a more active role in combating fraud in the Bitcoin market.

Financial regulators have given the green light to the first exchange-traded fund that lets investors buy into the red-hot cryptocurrency market. The Bitcoin Investment Trust is set to start trading Dec. 20 with shares listed on OTC Markets Group Inc.’s OTCQX. The fund’s sponsor is Grayscale Investments LLC, a subsidiary of Digital Currency Group Inc., Bloomberg reported.

The U.S. Securities and Exchange Commission has announced that it will closely monitor mutual funds that invest in bitcoin futures markets to ensure that the funds comply with the Investment Company Act. The institution warned of the dangers of investing in bitcoin futures markets due to the implied volatility of the underlying asset.

SEC warns funds against bitcoin futures

Yesterday, the U.S. Securities and Exchange Commission (SEC) issued a public statement titled Staff Statement on Funds Registered under the Bitcoin Futures Investment Company Act, indicating that it will increase its vigilance over funds that invest in bitcoin futures markets as part of their speculative strategies to maximize returns. The Division of Investment Management, the division of the SEC that oversees mutual funds and other investment products, will be the agency responsible for overseeing the conduct of these funds.

The public statement also warns these funds about the implied volatility of bitcoin and, by extension, the volatility of bitcoin futures markets. The statement states that:

Investors should consider the volatility of bitcoin and the bitcoin futures market, as well as the lack of regulation and the possibility of fraud or manipulation in the underlying bitcoin market.

The statement notes the lack of protection and the price manipulation by third parties to which the underlying may be exposed by influencing these markets.

The Investment Management Department announced that it will be monitoring several aspects, including an analysis of market liquidity to see if the liquidity is there to support these funds. This goes hand in hand with monitoring the impact of these funds on the bitcoin price, and analyzing the possibility of fraud or manipulation with these investment vehicles.

Bitcoin ETF may be approved soon

According to the statement, the market’s ability to support the launch of a bitcoin ETF will be thoroughly assessed. The SEC emphasized that it will:

Consider whether the bitcoin futures market could accommodate ETFs, given the experience of mutual funds investing in the bitcoin futures market, which, unlike mutual funds, cannot prevent additional investor money from flowing into ETFs if they become too large or dominate the market.

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The SEC has introduced and rejected several proposals to approve bitcoin ETFs in recent years, with former commission chairman Jay Clayton considered a cryptocurrency skeptic. But now that Clayton has resigned from his position with the institution, it seems they are at least considering it.

There have been many requests for bitcoin ETFs this year due to the growing interest in bitcoin because of the bull market, and there has even been a proposal for an Ethereum ETF. However, the tone in which the statement is written is not overly optimistic, which could mean that it will be some time before a cryptocurrency ETF is approved in the US.

What do you think of the SEC’s investigation into funds investing in bitcoin futures? Tell us what you think in the comments section below.

Photo credit: Shutterstock, Pixabay, Wiki Commons

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