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Fund With Bitcoin Futures Strategy Preps for Launch

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A new digital asset class to be offered through registered investment advisors is poised for takeoff.

“We are at the point that a registered closed-end interval fund with a Bitcoin futures strategy is preparing to launch,” Dalia Blass, director of the SEC’s Division of Investment Management, said in a Tuesday speech at the Investment Company Institute’s 2019 Securities Law Developments Conference in Washington.

The NYDIG Bitcoin Strategy Fund, advised by Stone Ridge Asset Management, will be distributed by ALPS Distributors.

Speaking on fund industry innovation, Blass noted her call last year to the fund industry to engage in a dialogue with the securities regulator on the “investor protection and substantive issues” presented by registered funds seeking to invest substantially in digital assets and related investments.

Before registering such funds, Blass urged fund complexes to assess valuation, custody, liquidity, the efficiency of the arbitrage mechanism for ETFs, and potential manipulation in the digital asset markets.

“The industry took the letter seriously, recognized there were open questions, and responded with thoughtful and constructive input,” she said.

The registered closed-end interval fund with a Bitcoin futures strategy, filed with the Commission Tuesday, answered the agency’s questions.

On valuation, Blass said, “this fund 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 to custody, the fund will invest in cash-settled futures “and so will not face the challenges presented by direct holdings of digital assets,” she continued.

Structured as a closed-end interval fund, the fund will not offer daily redemptions and will not be subject to potentially large, unexpected liquidity demands over short periods, she explained.

“And 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.”

The fund, she said, has also “taken steps to address issues related to potential manipulation in the digital asset markets,” including prominent risk disclosures, offering the product only through registered investment advisors, and limiting the size and future growth of the fund, with an initial cap of $25 million.

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