Illustration of a balanced scale with traditional finance on one side and crypto on the other, symbolizing the SEC's scrutiny of crypto funds.

Crypto Funds Under Scrutiny: What You Need to Know About SEC's Concerns

Lena Kashyap in Business & Economy December 2025 • 4 min read.

"The SEC is raising red flags about registered funds investing in cryptocurrencies. Here's a breakdown of what it means for your investments."

Cryptocurrencies have exploded in popularity, attracting both individual investors and large financial institutions. This surge has led to the creation of various investment products, including registered funds that offer exposure to the crypto market. However, the Securities and Exchange Commission (SEC) is now raising serious concerns about these funds.

The SEC's Division of Investment Management has voiced worries about registered funds investing in cryptocurrencies and related products. These concerns range from valuation and liquidity to custody and the potential for market manipulation. This article delves into these issues, providing a comprehensive understanding of the risks and implications.

Whether you're a seasoned investor or new to the crypto world, understanding the SEC's stance is crucial. This guide aims to break down the complex issues in a clear, accessible way, empowering you to make informed decisions about your investments.

Decoding the SEC's Concerns: A Deep Dive Into Cryptocurrency Fund Risks

Illustration of a balanced scale with traditional finance on one side and crypto on the other, symbolizing the SEC's scrutiny of crypto funds.

The SEC's primary focus is investor protection. The agency is tasked with ensuring that investment products are transparent, well-managed, and do not expose investors to undue risk. When it comes to crypto-related funds, the SEC has identified several key areas of concern that could potentially jeopardize these principles.

The SEC has outlined five major categories of concern in its review of registered investment companies that seek to invest in cryptocurrencies or related products. These are areas where they believe additional scrutiny is required to protect investors. Understanding these areas is key to comprehending the risks involved:

Valuation: The SEC questions how funds can accurately value cryptocurrencies, given their volatility, market fragmentation, and the lack of regulation in the cryptocurrency market.
Liquidity: The SEC is concerned about the liquidity of crypto assets. Specifically, the ability of a fund to convert its holdings into cash quickly to meet redemption requests.
Custody: The SEC raises concerns about the secure storage (custody) of cryptocurrencies, including the validation of ownership and the potential for cyber threats.
Arbitrage: For exchange-traded funds (ETFs), the SEC examines the feasibility of arbitrage mechanisms, which are essential for maintaining fair market pricing.
Potential Manipulation and Other Risks: The SEC is worried about potential fraud and manipulation in the cryptocurrency market and its impact on investors.

These concerns highlight the complexity of integrating cryptocurrencies into traditional investment vehicles. The SEC is essentially asking funds to demonstrate that they can adequately manage these risks before allowing them to offer these products to the public. The SEC's caution reflects the evolving nature of the crypto market and the need for robust regulatory frameworks to keep pace.

Navigating the Crypto Investment Landscape: What's Next?

The SEC's scrutiny of crypto funds isn't necessarily a death knell for crypto investments. Instead, it's a call for increased transparency, better risk management, and more robust regulatory frameworks. For investors, this means staying informed, doing thorough research, and understanding the specific risks associated with any crypto-related investment. As the regulatory landscape evolves, so too will the investment opportunities in the crypto space. The key is to approach these opportunities with caution, diligence, and a clear understanding of the risks involved.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1108/joic-04-2018-0034, Alternate LINK

Title: Sec’S Division Of Investment Management Voices Concerns Over Registered Funds Investing In Cryptocurrencies And Cryptocurrency-Related Products

Subject: General Medicine

Journal: Journal of Investment Compliance

Publisher: Emerald

Authors: Vadim Avdeychik, Justin Capozzi

Published: 2018-07-02

Everything You Need To Know

Why is the SEC paying so much attention to registered funds that invest in cryptocurrencies?

The Securities and Exchange Commission (SEC) is increasing its scrutiny of registered funds investing in cryptocurrencies because its primary focus is investor protection. The SEC wants to ensure investment products are transparent and well-managed, and that they don't expose investors to undue risk. Given the unique characteristics of the cryptocurrency market, the SEC is assessing whether funds can adequately manage risks related to valuation, liquidity, custody, arbitrage, and potential manipulation.

What specific concerns does the SEC have regarding the valuation of cryptocurrencies held by registered funds?

The SEC is concerned about how registered funds accurately value cryptocurrencies due to their volatility, market fragmentation, and lack of regulation. Establishing a precise and reliable valuation is challenging because cryptocurrency prices can fluctuate wildly, and there isn't a central, regulated exchange to provide consistent pricing data. This makes it difficult for funds to determine the fair market value of their crypto holdings, which impacts how they report their net asset value (NAV) to investors.

Liquidity is often mentioned, but what specific liquidity risks do crypto assets pose for registered funds according to the SEC?

The SEC is concerned about the liquidity of crypto assets held by registered funds and whether a fund can quickly convert its cryptocurrency holdings into cash to meet investor redemption requests. If a fund holds a significant portion of its assets in cryptocurrencies that are difficult to sell quickly without significantly impacting the price, the fund may struggle to fulfill redemption requests during periods of market stress. This potential illiquidity poses risks to investors who may not be able to access their funds when needed.

Besides just 'holding' the assets, what are the SEC's specific custody concerns related to registered funds investing in crypto?

The SEC's concerns about custody extend beyond just securely 'holding' cryptocurrencies. They include the validation of ownership and protection against cyber threats. The SEC needs reassurance that registered funds have robust systems in place to prove they actually own the cryptocurrencies they claim to hold, and that these assets are protected from theft, loss, or unauthorized access due to hacking or other cyberattacks. Without adequate custodial controls, investors are at risk of losing their investments due to fraud or security breaches.

How does the SEC view arbitrage mechanisms in cryptocurrency ETFs, and why is this important?

For cryptocurrency Exchange-Traded Funds (ETFs), the SEC examines the feasibility of arbitrage mechanisms, which are essential for maintaining fair market pricing. Arbitrage helps ensure that the ETF's market price aligns closely with the net asset value (NAV) of its underlying cryptocurrency holdings. If arbitrage is ineffective, the ETF's price may deviate significantly from its NAV, leading to unfair pricing and potential losses for investors. The SEC's scrutiny ensures these mechanisms function correctly to protect investors from price manipulation and inefficiencies.