SEC issues warning on bitcoin futures

US SEC concerned by the volatility and fraud risk of poorly regulated funds

                                

The US Securities and Exchange Commission (SEC) has warned investors that trading bitcoin futures is a highly speculative form of investment. The SEC's comments were made in an investor bulletin on Thursday 10 June. The commission warned investors to be vigilant about potential fraud, market volatility and a lack of regulation when investing in funds that buy or sell bitcoin futures.

The report came days after one of the SEC's commissioners, Hester Peirce, warned that stricter regulation of cryptocurrencies could discourage potential investors and stifle innovation.

In today’s bulletin, the SEC outlined key points that speculators should consider before investing in a fund that buys or sells bitcoin futures. The points included:

  • The investor’s risk tolerance. Investors should focus on the level of risk they are taking compared to the level of risk they are comfortable taking.
  • The fund’s disclosure of its risks. A fund is required to disclose the principal risks of investing in the fund in its prospectus.
  • Potential loss of the investment. All investments in funds involve risk of financial loss. This risk may be increased for positions in bitcoin futures contracts because of the high volatility of bitcoin and bitcoin futures (meaning prices can fluctuate widely). There is also the potential for fraud and manipulation in the underlying cash or ‘spot’ bitcoin market.
  • Difference in investment outcome. A rise in Bitcoin prices may not result in a similar increase in the value of a fund holding positions in Bitcoin futures contracts. This is in part because funds that trade commodity futures contracts may not have direct exposure to the contracts’ underlying assets. Futures contract prices can vary by delivery months and differ from the underlying commodity’s spot price. Futures contracts also expire periodically, resulting in fluctuations of portfolio exposure as expiring futures positions are typically rolled into new contracts.

Clamping down

This latest bulletin follows a statement issued by the SEC in May, which counselled investors to carefully consider the risks when investing in mutual funds exposed to the bitcoin futures market.

“Investors should consider the volatility of bitcoin and the bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying bitcoin market,” the statement said.

Last month the SEC’s chair Gary Gensler emphasised his organisation’s willingness to clamp down on illegal activity in the crypto asset space.

Gensler, who took the helm at the regulator earlier this year, argued that “the SEC and FINRA should be ready to bring cases involving issues such as crypto, cyber, and fintech”.

He added: “We need to do whatever we can to ensure that bad actors aren’t playing with working families’ savings and that the rules are enforced aggressively and consistently.”

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