The SEC’s recent decision allowing several US exchanges to list spot bitcoin funds threatens to upset a careful regulatory balance that has historically shielded retirement savers from cryptocurrency volatility and its potential for manipulation.
January’s omnibus approval order (SEC Release No. 34-99306), which followed an appeals court ruling in 2023 overturning the agency’s prior disapproval, has the potential to legitimize retail cryptocurrency investing, opponents and advocates agree.
The ruling may allow Wall Street-backed bitcoin-linked products to begin appearing in investors’ personal retirement savings vehicles or workplace 401(k)s, and could put pressure on other federal regulators to loosen their grip on remaining digital coin trading hurdles.
“One of the big issues we have with the approval is that it allows bitcoin to be presented to investors in a better way, even though it has the same risk, just in a different package,” said Ben Schiffrin, director for securities policy at Better Markets, a consumer-focused economic security nonprofit. “The underlying asset in these exchange-traded products is still just bitcoin.”
Digital assets such as bitcoin still bear many of the scars of the FTX Trading collapse in 2022, but prices are rebounding. Many of the 11 new funds the US Securities and Exchange Commission approved, which are hosted by financial giants such as
Spot funds directly track the value of their underlying assets. In this new regulatory environment, they have the potential to set a new precedent for diversified, alternative investing in retirement plans, paving the way for more mainstream adoption among investors eager to cash in on the resurgent crypto craze.
“At this point, it’s inevitable that bitcoin will make it into your 401(k),” said Ary Rosenbaum, a retirement plan attorney for his firm, The Rosenbaum Law Firm PC in New York. “There may be some concern left, but I think an exchange-traded fund will eliminate most of the hard opposition against offering it.”
Easier Access
ETFs eliminate entry barriers for mainstream retail customers interested in diversifying their retirement portfolios with crypto. Their listing on three major exchanges has already jolted the burgeoning individual retirement account crypto-market and scared consumer advocates.
Spot bitcoin trading, which began Jan. 10, capped a decade-long saga during which crypto proponents attempted to achieve equal market footing for stored-value bitcoin assets. The SEC was forced back to the negotiating table over spot bitcoin ETFs in 2022 after the US Circuit Court of Appeals for the District of Columbia vacated the agency’s prior rejection of a Grayscale Investments fund.
The court found that the agency’s stated concerns regarding the potential for significant bitcoin market manipulation and fraud didn’t track with the test SEC applied to futures markets a year prior, functionally failing to satisfy “reasoned decisionmaking” requirements under the law.
“The court sort of forced them into this,” said Chris Kline, co-founder and COO of Bitcoin IRA, an online trading platform that allows retail investors to buy a range of crypto assets directly. “It’s going to be a catalyst for mainstream adoption.”
Bitcoin IRA, which boasts around 200,000 account holders and more than $12 billion assets under management, was an early adopter of direct-to-consumer retirement crypto investing. Direct access puts investors in the driver’s seat and gives them 24-hour control. When bitcoin net asset value spiked $1,000 at 1 a.m. on Feb. 9, savvy Bitcoin IRA investors were quick to respond, Kline said.
Yet, personally owning digital assets comes with a lot of responsibility and risk, something Kline said he’s aware of. His firm was in talks this month about the feasibility of adding one or more of the 11 spot bitcoin ETFs to their investment lineups.
“When you invest in an IRA or a brokerage window, it’s up to the plan sponsor to keep track of the digital wallet and all the codes and keys,” said Rosenbaum, a self-described crypto trader. “But when you go the ETF route, these big firms like Schwab and Fidelity can cut you in directly.”
Workplace Hurdles
The logistical challenges on individual investors have slowed retirement plan crypto investing on the retail side. Meanwhile, institutional workplace 401(k)s seeking crypto investments face even more direct pushback from federal regulators.
The US Labor Department sent plan sponsors a clear warning in 2022, recommending against “direct investments in cryptocurrencies.” The guidance applies equally to funds that hold digital assets, such as ETFs, a DOL spokesperson told Bloomberg Law in a statement.
Yet, crypto critics fear spot ETFs framed as a “different package” of investment products altogether could benefit an industry that has resisted the DOL’s perspective on digital currencies in retirement funds.
“I think you’re going to see a propaganda campaign from bitcoin proponents and the crypto industry that will say to other agencies that, if the SEC approved of these products, you should take a different view, too,” said Schiffrin.
One crypto 401(k) provider already lost its bid to challenge the department’s guidance. A federal judge granted the department’s motion to dismiss a case ForUsAll Inc. brought against it in 2022, citing a dubious injury claim and the fact that the DOL Employee Benefits Security Administration’s guidance didn’t constitute a final agency action. The company has joined Fidelity in shaping a suite of crypto products geared to plan sponsor audiences.
Private-sector workplace plans have to abide by stricter standards of conduct when investing or choosing investment options on behalf of participants and beneficiaries. The DOL’s guidance (Compliance Assistance Release No. 2022-01) spelled out concerns EBSA had regarding “custodial and recordkeeping” and an “evolving regulatory environment.”
The SEC’s January decision may have settled at least part of the crypto regulatory environment. The agency is expected to consider other digital tokens such as Ethereum-backed ether later this year. As for custodial concerns, ETFs take the onus of responsibility off of individual investors or their plan sponsors.
Dubious Claims
When it greenlit the 11 bitcoin ETFs in January, the SEC appeared to tamp down any expectation that it was approving or endorsing the underlying digital assets. In a statement accompanying the decision, Chair Gary Gensler called bitcoin “a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion and terrorist financing.”
SEC Commissioner Caroline Crenshaw’s dissenting statement connected the risks of ETF products, whose value is tied to crypto directly, to the fate of workers’ nest eggs. The ETFs will “land squarely in the retirement accounts of U.S. households who can least afford to lose their savings to the fraud and manipulation that appears prevalent in the spot bitcoin markets,” she said.
The Labor Department similarly doesn’t seem willing to buy in on the notion that risk for investor harm from the ETFs is necessarily all that different from risks of direct bitcoin exposure.
EBSA’s guidance also referenced crypto’s “speculative and volatile nature.” Department officials share Gensler’s concern that “those dangers remain,” the DOL spokesperson said in their statement.
“The Department stands by its guidance on cryptocurrency,” the spokesperson said. “It is important that plan fiduciaries continue to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for the reasons we gave in that guidance.”
Practically speaking, however, in-plan adoption of cryptocurrency investments remains low, either as menu options or through brokerage windows. When EBSA issued its 2022 crypto warning, it announced an “investigative program” by which it would review plan portfolios for exposure to digital assets.
So far, the DOL spokesperson said, plans “generally appear to have refrained from adding digital assets to plan investment lineups.” Mutual funds, which differ slightly from ETFs, continue to dominate the 401(k) landscape, said Michelle Capezza, of counsel for employee benefits and executive compensation at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in New York.
“I don’t think plan sponsor considerations have changed much,” Capezza said. “For now, I think sponsors will remain cautious, but there may be some more interest from participants.”
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