Digital coins inside a vault under regulatory scrutiny.

Crypto Under Scrutiny: SEC's Stance on Registered Funds Investing in Digital Assets

Theo Raines in Law & Justice December 2025 • 4 min read.

"Navigating the Complexities: Understanding the SEC's concerns and challenges for cryptocurrency investments in registered funds."

The world of cryptocurrency continues to evolve, capturing the attention of investors and regulators alike. As interest in digital assets grows, fund sponsors are increasingly exploring avenues to bring cryptocurrency exposure to a wider audience through exchange-traded products (ETFs). However, this journey hasn't been without its hurdles, particularly with the U.S. Securities and Exchange Commission (SEC) taking a measured approach to these offerings.

In a staff letter issued on January 18, 2018, the SEC's Division of Investment Management addressed concerns related to registered investment companies seeking to invest in cryptocurrencies and related products. This letter, sent to the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA), outlined significant questions and highlighted the SEC's reservations about these investment vehicles.

This article delves into the SEC's perspective on registered investment companies investing in cryptocurrencies, providing an overview of the key questions raised by the SEC and the implications for the future of cryptocurrency investments in registered funds. By understanding the SEC's concerns, industry participants can better navigate the regulatory landscape and work towards addressing the challenges associated with cryptocurrency investments.

Decoding the SEC's Key Concerns: A Deep Dive

Digital coins inside a vault under regulatory scrutiny.

The SEC's staff letter underscores a cautious approach, reflecting a desire to ensure investor protection and market integrity. While acknowledging the growing interest in cryptocurrency investments, the SEC raises several fundamental questions about how registered funds can adequately address the unique challenges posed by these assets.

These are the areas of focus that the SEC outlined in the letter:

Valuation: How can funds accurately value cryptocurrencies and related products given their volatility, fragmentation, and the lack of regulation in underlying cryptocurrency markets?
Liquidity: Can funds ensure they have sufficient liquid assets to meet daily redemptions, considering the potential for steep market declines in the value of underlying assets?
Custody: How can funds satisfy the custody requirements of the 1940 Act and relevant rules when holding cryptocurrency directly, and how can they validate the existence, exclusive ownership, and software functionality of private cryptocurrency keys?
Arbitrage (for exchange-traded funds): How can ETFs maintain a market price that does not deviate materially from the ETF's net asset value (NAV), given the fragmentation, volatility, and trading volume of the cryptocurrency marketplace?
Potential Manipulation and Other Risks: How can funds address concerns about fraud or manipulation in the cryptocurrency market, and how can they ensure that investors, including retail investors, have sufficient information to understand the risks associated with cryptocurrency-related funds?

The SEC's concerns extend beyond technical considerations, encompassing broader issues of investor protection and market integrity. The SEC questions whether offering cryptocurrency-related funds is appropriate for a wide range of investors, including retail investors, who may not fully understand the risks involved. Additionally, the SEC seeks assurance that investment advisors can meet their fiduciary obligations when investing in cryptocurrency-related funds on behalf of retail investors.

The Path Forward: Navigating the Regulatory Landscape

The SEC's cautious approach to registered funds investing in cryptocurrencies reflects a commitment to investor protection and market integrity. While the path to launching cryptocurrency ETFs and other registered funds may be challenging, open dialogue and collaboration between industry participants and regulators are essential. By addressing the SEC's concerns and working towards a clear regulatory framework, the industry can pave the way for responsible innovation and expand access to cryptocurrency investments while safeguarding investors' interests.

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Everything You Need To Know

What specific concerns has the SEC raised regarding registered funds investing in cryptocurrencies?

The SEC has articulated several key concerns, primarily focusing on investor protection and market integrity. These concerns include the valuation of cryptocurrencies due to their volatility and the lack of regulation, ensuring sufficient liquidity to meet daily redemptions, addressing custody requirements in line with the 1940 Act, managing arbitrage for ETFs to prevent deviations from the net asset value (NAV), and mitigating the potential for market manipulation and fraud. These concerns highlight the SEC's measured approach to cryptocurrency investments within registered funds.

Why is the SEC particularly focused on the 'Valuation' of cryptocurrencies within registered funds?

The SEC is heavily focused on the 'Valuation' aspect because cryptocurrencies are known for their extreme volatility, fragmentation across different exchanges, and the general absence of robust regulatory oversight in the underlying cryptocurrency markets. Without a reliable and consistent valuation method, registered funds may struggle to accurately determine the net asset value (NAV) of their cryptocurrency holdings. This uncertainty can significantly impact investor confidence and create opportunities for market manipulation, making it a primary concern for the SEC.

How does the SEC's concern about 'Custody' relate to the 1940 Act for registered funds holding cryptocurrencies?

The SEC's concern about 'Custody' is directly related to the requirements of the 1940 Act, which mandates that registered funds must ensure the safe custody of their assets. When applied to cryptocurrencies, this raises complex questions about how funds can demonstrate exclusive ownership, validate the existence of private cryptocurrency keys, and ensure the integrity of the software functionality governing these digital assets. Unlike traditional assets held by custodians, cryptocurrencies present unique technological and security challenges that must be addressed to satisfy the 1940 Act's custody requirements.

What implications does the SEC's scrutiny have for retail investors interested in cryptocurrency ETFs?

The SEC's scrutiny implies that there's a cautious approach towards offering cryptocurrency ETFs to retail investors. The SEC wants to ensure that retail investors fully understand the unique risks associated with these assets, including volatility, potential fraud, and market manipulation. Additionally, the SEC is examining whether investment advisors can meet their fiduciary obligations when recommending cryptocurrency-related funds to retail investors. This cautious approach may result in stricter regulations, increased disclosure requirements, or potentially slower approval processes for cryptocurrency ETFs, all aimed at protecting retail investors.

In the context of cryptocurrency ETFs, why is 'Arbitrage' a key concern for the SEC, and what challenges does it present?

Arbitrage is a key concern for the SEC because exchange-traded funds (ETFs) rely on arbitrage mechanisms to maintain a market price that closely tracks the ETF's net asset value (NAV). However, the fragmentation, volatility, and varying trading volumes in the cryptocurrency marketplace can disrupt these arbitrage mechanisms. The SEC worries that these disruptions could lead to significant deviations between the ETF's market price and its NAV, potentially harming investors. Ensuring effective arbitrage in cryptocurrency ETFs is challenging due to the unique characteristics of digital asset markets, making it a focal point for regulatory oversight.