SEC tells investment firms to hold off on cryptocurrency funds

The Securities and Exchange Commission (SEC) said Friday that funds holding or tracking cryptocurrencies pose “significant investor protection issues” and should not be registered with exchanges.

Dalia Blass, director of the SEC’s investment management division, wrote in a letter to two of the securities industry internal regulators that the agency has “significant outstanding questions” about how cryptocurrency funds would comply with federal trading laws.

“Until the questions identified above can be addressed satisfactorily,” Blass wrote, “we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products and we have asked sponsors that have registration statements filed for such products to withdraw them.”

Investors flocked to cryptocurrencies such as Bitcoin as their values skyrocketed toward the end of 2017. Major exchanges began trading cryptocurrency derivatives — bets on the future value of an asset — and listing funds that included cryptocurrencies.

As crypto values began to drop after Christmas, several investment firms either abandoned those plans or were blocked from doing so. The SEC also stepped up its crackdown on initial coin offerings, in which a company sells shares as units of proprietary cryptocurrency.

Blass listed dozens of questions about how cryptocurrencies would be fairly and consistently valued, how crypto funds could hold the legal minimum of liquid assets, the impact of futures trades on cryptocurrencies and manipulations risks.

“Although some funds may propose to hold cryptocurrency-related products, rather than cryptocurrencies, the pricing, volatility and resiliency of these derivative markets generally would be expected to be strongly influenced by the underlying markets.”

The SEC letter comes as lawmakers and regulators mull how to handle the rapid rise of cryptocurrencies. SEC Chairman Jay Clayton and Commodity Futures Trading Commission Chairman J. Christopher Giancarlo will testify before the Senate Banking Committee in February on their efforts to oversee cryptocurrencies.

Treasury Secretary Steven Mnuchin said last week that the nations of the Group of 20 economic coalition in April would discuss how to prevent cryptocurrency money laundering and illicit finance.