A digital labyrinth of circuit boards and crypto symbols leading to a coin.

Crypto on Wall Street: Navigating SEC's Regulatory Maze for Investment Funds

Avery Sinclair in Law & Justice August 2025 • 4 min read.

"Decoding the SEC's Stance on Cryptocurrency Investments: A Guide for Fund Managers and Investors Alike."

The allure of cryptocurrency has captured Wall Street's imagination, with various fund sponsors eager to introduce crypto exchange-traded products to the masses. Yet, this journey has been anything but smooth, marked by regulatory hurdles and cautious pronouncements from the U.S. Securities and Exchange Commission (SEC).

Adding to the complexity, on January 18, 2018, the Division of Investment Management issued a staff letter to industry groups, including the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA). The letter raised critical questions and concerns regarding registered investment companies seeking to invest in cryptocurrencies and cryptocurrency-related products.

This article serves as a compass, guiding fund managers and investors through the SEC's perspective on crypto investments. We'll explore the key questions posed by the SEC, offering insights on valuation, liquidity, custody, arbitrage, and potential manipulation risks.

Decoding the SEC's Concerns: Key Questions for Crypto Investment Funds

A digital labyrinth of circuit boards and crypto symbols leading to a coin.

In its staff letter, the SEC highlighted that cryptocurrencies and related products differ significantly from traditional investments held by registered funds. As a result, the agency has specific questions about how funds holding substantial amounts of these assets can meet the requirements of the 1940 Act and its associated rules. These questions fall into five main categories:

Let's examine each of these categories:

Valuation: Can funds accurately value cryptocurrencies, given their volatility, fragmentation, and the nascent state of crypto markets? How can funds develop robust policies to "fair value" these products?
Liquidity: How can funds ensure they have sufficient liquid assets to meet daily redemption needs when investing in cryptocurrencies? How should crypto assets be classified under the new fund liquidity rule 22e-4?
Custody: How can funds satisfy custody requirements under the 1940 Act when holding cryptocurrency directly? What measures can be taken to validate ownership and protect private keys from cybersecurity threats?
Arbitrage (for ETFs): Given the volatility and fragmentation of crypto markets, how can ETFs maintain a market price that doesn't deviate significantly from their net asset value (NAV)? How would volatility-based trading halts affect arbitrage mechanisms?
Potential Manipulation and Other Risks: How do concerns about fraud and manipulation in the crypto market influence a fund sponsor's approach to valuation and liquidity? Is offering a crypto fund appropriate for retail investors, and do investors have sufficient information to understand the risks?

Let's explore further. The staff also raised questions about accounting practices, particularly how funds would address significant events like cryptocurrency forks, where a blockchain diverges into different paths, potentially creating new cryptocurrencies with varying prices.

The Path Forward: Dialogue and Diligence

The SEC's stance underscores the importance of open communication between fund sponsors and the agency. By proactively addressing the SEC's concerns and demonstrating a commitment to investor protection, fund managers can pave the way for launching registered investment companies that offer exposure to the exciting world of cryptocurrencies while adhering to regulatory standards.

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Everything You Need To Know

What are the primary concerns the SEC has regarding investment funds and their crypto holdings?

The SEC has expressed significant concerns about investment funds' involvement with cryptocurrencies, primarily focusing on five key areas: valuation, liquidity, custody, arbitrage (specifically for ETFs), and potential manipulation and other risks. These concerns stem from the unique characteristics of cryptocurrencies, such as their volatility, fragmentation of markets, and the nascent nature of the crypto landscape, which differ greatly from traditional investments. The SEC is keen on ensuring that funds can accurately value crypto assets, maintain sufficient liquidity for redemptions, securely hold these assets, and mitigate risks related to market manipulation. The staff letter issued on January 18, 2018, to the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA) highlighted these critical questions.

How does the SEC's focus on valuation impact crypto investment funds?

The SEC's focus on valuation requires funds to develop robust policies for 'fair valuing' cryptocurrencies, given their volatility and the fragmented state of the crypto markets. Funds must establish processes to accurately determine the value of their crypto holdings, especially in volatile market conditions. This includes addressing the challenges posed by the varying prices across different exchanges and the potential for rapid price changes. Furthermore, funds need to consider the impact of significant events like cryptocurrency forks on valuation.

What are the custody requirements for investment funds holding cryptocurrencies, according to the SEC?

The SEC requires funds to satisfy custody requirements under the 1940 Act when holding cryptocurrencies directly. This means funds must ensure the safekeeping of their crypto assets. This involves validating ownership and protecting the private keys associated with the cryptocurrencies from cybersecurity threats. Funds need to demonstrate that they have adequate measures in place to safeguard these digital assets from theft or loss, which is a critical aspect of investor protection. This includes secure storage solutions and robust controls.

How does the SEC view the liquidity of crypto assets in relation to investment funds, and what is the implication of Rule 22e-4?

The SEC is concerned about how funds can ensure sufficient liquid assets to meet daily redemption needs when investing in cryptocurrencies. The agency is focused on how funds should classify crypto assets under the new fund liquidity rule 22e-4, which is designed to ensure funds have enough liquid assets to meet investor redemption requests promptly. This involves assessing the ability of funds to convert their crypto holdings into cash quickly without significantly impacting the market price, especially during periods of high volatility or market stress.

What steps should fund managers take to navigate the SEC's regulatory landscape for crypto investments?

Fund managers should proactively address the SEC's concerns by demonstrating a commitment to investor protection and maintaining open communication with the agency. This includes developing robust valuation, liquidity, and custody policies that align with regulatory standards. Addressing the risks of market manipulation is also crucial. By diligently considering these aspects, fund managers can pave the way for launching registered investment companies that offer exposure to cryptocurrencies while adhering to the guidelines outlined by the SEC. Understanding the implications of the 1940 Act and its associated rules is fundamental to this process.