Bitcoin Bull on Wall Street

Crypto on Wall Street: Are Bitcoin ETFs Too Risky for Main Street Investors?

Elliot Brynn in Business & Economy August 2025 • 3 min read.

"SEC's cautious approach to cryptocurrency investments: Balancing innovation and investor protection."

The world of cryptocurrency is rapidly changing, with new opportunities and challenges arising all the time. Over the past few years, fund sponsors have been exploring ways to bring cryptocurrency exchange-traded products (ETPs) to a wider audience. However, this journey has been difficult, and recent announcements from the U.S. Securities and Exchange Commission's (SEC) Division of Investment Management suggest that it's just beginning.

In a staff letter issued January 18, 2018, the Division of Investment Management raised questions and concerns regarding registered investment companies investing in cryptocurrencies and related products. This letter, sent to the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA), highlights the SEC's cautious stance on these investments.

This article breaks down the key issues raised by the SEC and what they mean for the future of cryptocurrency investment. We'll explore the SEC's concerns about valuation, liquidity, custody, and potential manipulation, offering insights for investors and industry participants alike.

What Concerns Does the SEC Have About Crypto Investments?

The SEC's staff letter highlights concerns about registered investment companies investing in cryptocurrencies. They note that cryptocurrencies and related products are unlike the types of investments that registered funds currently hold and offer to retail customers. As a result, the SEC is questioning how funds holding substantial amounts of cryptocurrencies would meet the requirements of the 1940 Act and its rules.

These concerns are grouped into five main categories:

Valuation: Ensuring accurate and reliable pricing of crypto assets.
Liquidity: Maintaining sufficient liquid assets to meet daily redemption requests.
Custody: Safeguarding crypto assets with qualified custodians.
Arbitrage: Addressing price differences across cryptocurrency marketplaces (for exchange-traded funds).
Potential Manipulation and Other Risks: Preventing fraud, manipulation, and other risks in the cryptocurrency market.

Let’s dive deeper into each of these categories.

What Does This Mean for the Future of Crypto ETFs?

The SEC's cautious approach suggests that the path to launching a registered investment company that invests in cryptocurrencies will not be easy. Fund sponsors will need to address the SEC's concerns and provide clear answers to their questions. While the SEC has neither fully rejected nor fully embraced crypto ETFs, they are signaling a need for more information and safeguards before these products can be offered to retail investors.

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Everything You Need To Know

What specific issues does the SEC have with registered investment companies investing in cryptocurrencies?

The SEC's Division of Investment Management has raised several concerns regarding registered investment companies investing in cryptocurrencies. These concerns primarily revolve around how these funds would meet the requirements of the 1940 Act, considering the unique nature of crypto assets. The key areas of concern include: Valuation (ensuring accurate pricing of crypto assets), Liquidity (maintaining sufficient liquid assets for daily redemption requests), Custody (safeguarding crypto assets with qualified custodians), Arbitrage (addressing price differences across crypto marketplaces, especially for ETFs), and Potential Manipulation and Other Risks (preventing fraud and manipulation in the crypto market).

Why is the SEC concerned about the 'Valuation' of cryptocurrencies in registered investment companies?

The SEC is concerned about the 'Valuation' of cryptocurrencies because accurately and reliably pricing these assets can be challenging. Cryptocurrencies lack a centralized exchange and consistent pricing mechanisms, unlike traditional assets. The volatile nature of cryptocurrencies and the potential for price manipulation make it difficult for registered investment companies to determine a fair and consistent net asset value (NAV). Without accurate valuation, investors may not have a clear understanding of the true worth of their investments, leading to potential misinformed decisions.

What considerations must fund sponsors address to potentially launch a cryptocurrency ETF that satisfies the SEC's requirements?

To potentially launch a cryptocurrency ETF that satisfies the SEC's requirements, fund sponsors must comprehensively address the SEC's concerns outlined in their staff letter. Specifically, sponsors need to demonstrate robust and reliable methods for 'Valuation' of crypto assets, ensuring accurate and transparent pricing. They must also establish sufficient 'Liquidity' to meet daily redemption requests without disrupting the fund's operations. Secure 'Custody' arrangements with qualified custodians are essential to safeguard the crypto assets. For ETFs, strategies to handle 'Arbitrage' opportunities and minimize price discrepancies across different cryptocurrency exchanges must be in place. Furthermore, sponsors need to implement rigorous measures to mitigate 'Potential Manipulation and Other Risks,' such as fraud, market manipulation, and cybersecurity threats. Addressing these points will require clear, detailed plans that assure investor protection and market integrity.

How does the SEC's cautious stance on crypto ETFs impact retail investors?

The SEC's cautious stance on crypto ETFs has significant implications for retail investors. By scrutinizing and raising concerns about valuation, liquidity, custody, arbitrage, and potential manipulation, the SEC is effectively acting as a gatekeeper. This approach limits retail investors' access to cryptocurrency investments through registered investment companies until sufficient safeguards are in place. While it may delay the availability of crypto ETFs, this caution aims to protect retail investors from the unique risks associated with cryptocurrencies, such as fraud, market manipulation, and the lack of regulatory oversight. This ensures that when these products become available, they meet certain standards of investor protection and market integrity.

What does the SEC mean by 'Custody' when referring to the risks of cryptocurrency investments, and why is it so important?

When the SEC refers to 'Custody' in the context of cryptocurrency investments, they are addressing the safeguarding of crypto assets. Unlike traditional assets held by regulated custodians, cryptocurrencies pose unique custodial challenges due to their digital nature and reliance on cryptographic keys. The SEC is concerned that registered investment companies must use 'qualified custodians' to hold these assets securely. This ensures that the crypto assets are protected from theft, loss, or unauthorized access. Without proper custody arrangements, investors' funds could be at significant risk, making secure 'Custody' a critical aspect of investor protection and a key requirement for SEC approval of cryptocurrency investment products.