Cryptocurrency may be one of the most significant asset classes to emerge in recent years and is progressively garnering more institutional support and regulatory legitimacy than initially expected. With Bitcoin as one of the largest and most well-known cryptocurrencies, the potential approval of a Bitcoin spot ETF by the U.S. Securities and Exchange Commission (SEC) has generated both excitement and questions within the investment advisory community given the still unconfirmed regulatory clarity.
A Bitcoin Spot ETF would provide investors exposure to the underlying asset without establishing a digital wallet on a cryptocurrency exchange, allowing for increased accessibility, and eliminating some of the technical hurdles that plague less crypto-native investors, along with minimizing security concerns associated with acquiring and safeguarding assets in private wallets.
While the launch of the first Bitcoin futures ETF was a major breakthrough, a Bitcoin spot ETF would bring the asset more mainstream momentum, likely increasing further institutionalization. SEC registered investment advisers have several compliance considerations that should be taken into account if incorporating the Bitcoin spot ETF into their offerings: advisers should ensure documented rationale is maintained evidencing due diligence and appropriateness of the investment, including suitability for retail investors in particular which was noted in the October 16, 2023, release of the SEC’s Division of Examinations 2024 examination priorities (https://www.salusgrc.com/post/sec-releases-2024-exam-priorities). Advisers should also ensure disclosure documents include the characteristics and risks associated with investing in Bitcoin, including any conflicts of interest and associated fees.
Advisers should also keep in mind the issues highlighted in the SEC Division of Examination’s risk alert on Digital Asset Securities (www.sec.gov/files/digital-assets-risk-alert.pdf) issued on February 26th, 2021. The alert specifically calls out investment advisers to ensure procedures are in place to classify how digital assets are treated in client portfolios, articulate valuation methodologies, ensure proper disclosures and custody controls, and related registration issues.
Currently, the SEC is considering 14 spot Bitcoin ETF applications from various financial institutions. While the industry awaits regulatory clarity on both the Bitcoin spot ETF and digital assets generally, advisers should continue to track regulatory updates and monitor their compliance programs carefully to ensure compliance with industry best practices that champion investor protection.