Dalia Blass, director of the Security and Exchange Commission’s (SEC’s) Division of Investment Management told an audience at the 2019 ICI Securities Law Developments Conference this week, “that a registered closed-end interval fund with a bitcoin futures strategy is preparing to launch.”
According to Investopedia:
“An interval fund is a type of closed-end fund with shares that do not trade on the secondary market. Instead the fund periodically offers to buy back a percentage of outstanding shares at net asset value (NAV)…this investment (is) largely illiquid compared with other funds. High yields are the main reason investors are attracted to interval funds. Depending on the fund and its guidelines, shares may be restricted to accredited investors but most interval funds are available to anyone…buying is easy but expensive.”
There have been many attempts by various parties to have Bitcoin-based ETFs approved at the SEC, but none so fair have made it to market.
The SEC says that underlying Bitcoin spot markets are still too unregulated and messy to warrant creation of certain derivatives. Cryptocurrency fans have counter-accused the SEC of “stifling innovation.”
Blass assured the audience that the SEC is committed to modernizing its rules though, “At the same time, even new products need established protections, particularly when the products will be marketed to retail investors. This balancing act is not always easy.”
Blass said the new Bitcoin futures interval fund has come about as a result of the issuing-company’s “direct engagement” with her department and close observation of a letter she issued, “calling on the fund industry to engage in a dialogue on the investor protection and substantive issues presented by (digital asset) investments.”
“Issues identified in the letter focused on valuation, custody, liquidity, the efficiency of the arbitrage mechanism for ETFs, and potential manipulation in the digital asset markets,” Blass said. “My letter called for funds seeking to invest substantially in digital assets to grapple with these questions before filing a registration statement.”
The fund close to launch did exactly that, Blass claimed:
“For example, on valuation, this fund expects to generally value its bitcoin futures holdings at daily settlement prices reflected on a CFTC-registered futures exchange, consistent with the principles of the Investment Company Act of 1940 and U.S. GAAP.”
“With respect to custody, the fund will invest in cash-settled futures and so will not face the challenges presented by direct holdings of digital assets.”
Blass does not think the fund will fan the flames of volatility:
“Structured as a closed-end interval fund, the fund will not offer daily redemptions and will not be subject to potentially large, unexpected liquidity demands over short periods. And as an unlisted fund, its pricing will not depend on an efficient arbitrage mechanism and the willingness of market makers to make markets in a fund pursuing a digital asset strategy.”
One of the SEC’s pet peeves, cited in several rejections of Bitcoin ETF proposals, has been strong indications of widespread market manipulation in crypto. Even prominent cryptocurrency exchanges have been accused of using customer funds to conduct wash trades and other malfeasance.
“The fund also has taken steps to address issues related to potential manipulation in the digital asset markets,” said Blass. “This includes prominent risk disclosures, offering the product only through registered investment advisers, and limiting the size and future growth of the fund, with an initial cap of $25 million.”
Blass said she her staff greatly appreciate feedback and engagement from the financial services sector. “The industry took the letter seriously, recognized there were open questions, and responded with thoughtful and constructive input.”
SEC Commissioner Hester Pierce, who has been dubbed “Crypto Mom” by fans for her open-mindedness towards the sector, tweeted that the fund’s approval constitutes, “a bit of progress at the SEC.”
A bit of progress: “we are at the point that a registered closed-end interval fund with a bitcoin futures strategy is preparing to launch.” –Dalia Blass https://t.co/WV1M18f2Ug
— Hester Peirce (@HesterPeirce) December 4, 2019
Earlier this week Crowdfund Insider reported on asset manager Stone Ridge filing a registration statement with the SEC for the NYDIG Bitcoin Strategy Fund. Stone Ridge currently manages around $15 billion of assets. The closed-end Bitcoin Fund is seeking to raise up to $25 million.