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The US Securities and Exchange Commission Approves Bitcoin Futures

The U.S. Securities and Exchange Commission (SEC) has approved an investment fund that will invest in bitcoin futures contracts. The SEC has also revealed why it decided to approve such a fund.

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The U.S. SEC declared the registration statement filed by Stone Ridge Trust VI for the NYDIG Bitcoin Strategy Fund effective on Monday, Dec. 9. The company filed Form N-2 with the SEC on Oct. 2 and amended it twice, on Oct. 16 and Nov. 26.

This form is used by closed-end management investment companies to register and offer their shares under the Securities Act. Stone Ridge Asset Management Llc will be the fund’s investment adviser. As of Aug. 30, the company managed approximately $15 billion of assets.

The NYDIG Bitcoin Strategy Fund “is a non-diversified, closed-end management investment company that continuously offers its shares,” the filing details, adding:

“The fund pursues its investment objective primarily by investing in bitcoin futures contracts … The only bitcoin futures in which the fund will invest are cash-settled bitcoin futures traded on commodity exchanges registered with the CFTC.

What the fund will do and will not do

“The fund will not invest in bitcoin or other digital assets directly,” the filing emphasizes. “The fund will seek to purchase a number of bitcoin futures so that the total value of the bitcoin underlying the bitcoin futures held by the fund is as close to 100% of the net assets of the fund.” Its shares are being offered initially at an offering price of $10 per share. Only institutional investors, their clients, and certain eligible investors as specified in the fund’s prospectus can invest in the fund. Currently, CME is the only CFTC-approved exchange offering cash-settled bitcoin futures contracts.

The fund has an interval structure; it aims to conduct quarterly share repurchase offers, which it expects to be for a maximum of 5% of the fund’s outstanding shares at net asset value per quarter. The initial quarterly repurchase offer is planned for May 2020. This fund will not be a bitcoin exchange-traded fund (ETF), however, as its filing states:

The fund’s shares are not listed and the fund does not currently intend to list its shares for trading on any national securities exchange.

At the 2019 ICI Securities Law Developments Conference on Tuesday, Dalia Blass, Director of the SEC’s Division of Investment Management, talked about cryptocurrency ETFs and the SEC staff’s decision to approve a fund investing in bitcoin futures contracts. “We welcome and value constructive industry engagement regarding new products and novel investment strategies,” she said. “A prime example of such engagement involves registered funds seeking to invest substantially in digital assets and related investments.”

Blass explained that she issued a public letter last year calling on the fund industry to discuss issues presented by such investments, elaborating: As a result of this engagement, we are at the point that a registered closed-end interval fund with a bitcoin futures strategy is preparing to launch. To reach this point, the fund first responded to each of the issues identified in the staff letter.

Without naming the fund, Blass explained that it expects “to generally value its bitcoin futures holdings at daily settlement prices reflected on a CFTC-registered futures exchange, consistent with the principles of the Investment Company Act of 1940 and U.S. GAAP.”

As for custody, the director clarified that since the fund will invest in cash-settled bitcoin futures, it “will not face the challenges presented by direct holdings of digital assets.” In addition, it is a closed-end interval fund which means it “will not offer daily redemptions and will not be subject to potentially large, unexpected liquidity demands over short periods.” Blass further described that “as an unlisted fund, its pricing will not depend on an efficient arbitrage mechanism and the willingness of market makers to make markets in a fund pursuing a digital asset strategy,” noting that the fund also has taken steps to address issues related to potential manipulation in the digital asset markets.

“This includes prominent risk disclosures, offering the product only through registered investment advisers, and limiting the size and future growth of the fund, with an initial cap of $25 million,” the director stated while concluding.

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