Bitcoin retirement plans prompt caution from regulators

Although the crypto market continues to make an impressive recovery from the bear market of 2022, the industry continues to attract the ire of regulators around the world, especially in the United States. Three US financial watchdogs recently issued stern warnings to individuals looking to invest in pension funds that offer exposure to digital assets.

The US Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy, the North American Securities Administrators Association and the Financial Industry Regulatory Authority (FINRA) warned investors that individual retirement accounts (IRAs) that include cryptocurrencies could potentially be classified as “securities”. ,” unless they are registered with the SEC or have a valid certificate of exemption.

Also, in the past year, many policymakers have continued to target cryptocurrency investment vehicles, such as retirement accounts, citing the string of insolvencies witnessed last year. For example, New York Attorney General Letitia James has repeatedly called for a ban on all crypto-inclusive defined contribution plans and IRAs.

Regulators are understandably cautious, with a Canadian teacher’s pension fund, the Ontario Teacher’s Pension Plan, taking a $95 million loss on its significant stake in the FTX crypto exchange.

However, some prominent crypto supporters in the US Senate, such as Wyoming Senator Cynthia Lummis, believe that Bitcoin (BTC) should be part of 401(k) retirement plans.

Are crypto pension funds a good idea?

To better understand whether it makes sense to include cryptocurrencies in pension funds, Cointelegraph reached out to Ilan Sterk, CEO of Altshuler Shaham Horizon – an Israeli provider of cryptocurrency custody and trading – one of the few crypto firms in the country approved to deal with banks .

According to Sterk, minimal exposure to digital assets can be a good fit for long-term pension-focused investments. He added, “For retirees, an investment portfolio can be allocated between various assets such as securities, bonds, hedge funds, digital assets and private equity. Blockchain and digital assets are considered a relatively new field, but with high utilization and a wide ecosystem, so it can be fruitful to allocate a conservative portion to such investments.”

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That said, he agrees with the warnings issued by the SEC and FINRA, especially as they pertain to retirement accounts that hold the hard-earned savings of many people. Sterk said crypto is a “very volatile investment for a retirement account,” and so people investing in such offerings should take time to understand the inherent risks associated with digital assets. He added:

“I think regulators are critical to organizing new investment fields like digital assets, as well as laying out clear guidelines, especially for retirement accounts, so investors don’t find themselves penniless when they reach retirement.”

In 2021, the Israel Capital Markets, Insurance and Savings Authority published similar guidelines for local institutions – including insurance funds and pension funds – telling institutions that should they decide to invest in Bitcoin, they must detail and explain their decision to the regulator.

Extreme volatility of crypto

Wade Wang, founder and CEO of Safeheron — a digital asset self-custody provider that recently integrated its multi-party multi-signature security solution with MetaMask — told Cointelegraph that it is “not recommended” that pension funds seeking long-term returns be exposed . to cryptocurrencies, at least in the near future. He added:

“Investing in digital assets comes with high uncertainty and severe volatility. So far, any coins or tokens in the crypto landscape have been circulated within their own individual markets. The circulation between these different ecosystems, especially traditional ones like pension funds, requires significantly more development.”

Wang emphasized that crypto should not be seen differently from other forms of investment. As the industry matures and new Web3 applications emerge, many traditional funds – including family offices and pension funds – will continue to look at digital assets.

Zoomers want crypto in their retirement funds

According to a survey conducted by US asset manager Charles Schwab during the fourth quarter of 2022, nearly 50% of Zoomers and millennials want to see crypto become part of their 401(k) retirement plans. Millennials were born in the early 1980s to mid-1990s, while Zoomers were born in the mid-to-late 1990s and early 2010s.

Analysts for Charles Schwab found that 46% of Zoomers and 45% of millennials want to invest in cryptocurrencies as part of their retirement plans. In addition, the survey found that 43% of Zoomers and 47% of millennials had already put some of their savings into digital assets outside of retirement plans.

These results stand in stark contrast to another survey conducted by the investment manager, which found that only 31% of Gen Xers and 11% of boomers — those born anywhere between the mid-1940s to the late 1970s – were keen to invest in digital currencies through their 401(k) pension plans.

Bill to remove roadblocks

On February 15, Alabama Senator Tommy Tuberville announced that he would reintroduce the Financial Freedom Act to allow US 401(k) retirement plans to gain exposure to cryptocurrency. The bill, first introduced in the Senate in May 2022, seeks to reverse a US Department of Labor (DOL) policy that governs the type of investments allowed in 401(k) plans, including crypto.

In Tuberville’s words, the bill seeks to prevent the DOL from pursuing enforcement actions for individuals who use brokerage windows to invest in digital assets. “The federal government should not pick winners and losers in the investment game. My bill ensures that everyone who earns a paycheck has the financial freedom to invest in their future as they see fit,” Tubernille added.

The bill’s co-sponsors include several prominent pro-crypto senators, including Cynthia Lummis, Rick Scott and Mike Braun. In a December 2022 interview, Senator Lummis stated that despite the recent market crash, she is still quite comfortable with the idea of ​​Americans incorporating Bitcoin into their retirement funds.

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Similarly, Florida Representative Byron Donalds said on February 14 that he wanted to introduce a bill similar to Tuberville’s in the House of Representatives. Both Donalds and Tuberville are likely to face stiff opposition from members of the Democratic Party, as Sen. Elizabeth Warren has repeatedly expressed concern about crypto being included in 401(k) plans. Senator Roger Marshall also shares a similar attitude.

What’s coming?

Since the beginning of 2022, the DOL has warned pension fund owners about crypto, asking them to exercise extreme caution when handling cryptocurrencies, citing the risk of fraud, theft and loss of funds. Other regulators have also taken similar stances around the world. As crypto adoption grows, time will tell how lawmakers view this new asset class, especially from a long-term investment perspective.