Even as the crypto market continues to carve out an impressive recovery from the 2022 bear market, the industry continues to draw the ire of regulators around the world, especially in the United States. Three US financial regulators recently issued stern warnings to people looking to invest in retirement funds that offer exposure to digital assets.
The U.S. 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 exemption certificate.
Additionally, in the past year, many lawmakers have continued to target cryptocurrency investment vehicles such as retirement accounts, citing the series of insolvencies witnessed last year. For example, New York Attorney General Letitia James has repeatedly called for a ban on all crypto contribution plans and IRAs.
Regulators are understandably cautious, with one Canadian teacher pension fund, the Ontario Teachers Pension Plan, taking a $95 million loss on its substantial stake in crypto exchange FTX.
However, some prominent cryptocurrency advocates in the US Senate, such as Wyoming Senator Cynthia Lummis, believe that Bitcoin (BTC) should be a part of 401(k) retirement packages.
Are crypto retirement funds a good idea?
To better understand whether including cryptocurrency in pension funds makes investment sense, Cointelegraph reached out to Ilan Sterk, CEO of Altshuler Shaham Horizon, an Israeli cryptocurrency trading and custody provider, one of the few cryptocurrency companies in the country approved to deal with banks.
According to Sterk, minimal exposure to digital assets can be a good fit for long-term, retirement-focused investments. He added: “For pensioners, an investment portfolio can be allocated among various assets such as stocks, bonds, hedge funds, digital assets, and private equity. Blockchain and digital assets are considered a relatively new field but with high utilization and a broad ecosystem, so allocating a conservative slice to such investments could be fruitful.”
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That said, he agrees with the warnings issued by the SEC and FINRA, especially since they concern retirement accounts that contain the hard-earned savings of many people. Sterk said that cryptocurrencies are a “very volatile investment for a retirement account” and therefore people investing in such offerings should take the time to understand the inherent risks associated with digital assets. He added:
“I think regulators are crucial to organize new investment fields like digital assets, as well as to set clear guidelines, especially for pension accounts, so that investors don’t run out of money in retirement.”
In 2021, the Israel Savings, Insurance and Capital Markets Authority published similar guidelines for local institutions, including provident funds and pension funds, which tell institutions that if they decide to invest in Bitcoin, they must detail and explain their decision to the regulatory body.
Extreme volatility of cryptocurrencies
Wade Wang, the founder and CEO of Safeheron, a digital asset self-custody provider that recently integrated its multi-party computer-based multi-signature security solution with MetaMask, told Cointelegraph that it is “not recommended” that yield-seeking retirement funds are exposed in the long term. to cryptocurrencies, at least in the near future. He added:
“Investing in digital assets comes with great uncertainty and severe volatility. Until now, any coin or token within the crypto landscape circulates within their own individual markets. The circulation between these different ecosystems, especially the traditional ones such as pension funds, requires considerably more development”.
Wang stressed that cryptocurrencies should not be viewed any differently from other forms of investment. As the industry matures and new Web3 applications emerge, many traditional funds, including family offices and retirement funds, will continue to pay attention to digital assets.
Zoomers wants cryptocurrency in its retirement funds
According to a survey conducted by US asset manager Charles Schwab during the fourth quarter of 2022, almost 50% of zoomers and millennials want cryptocurrency to become part of their 401(k) retirement plans. . Millennials were born between the early 1980s and mid 1990s, while Zoomers were born between the mid to late 1990s and early 2010s.
Analysts at Charles Schwab found that 46% of Zoomers and 45% of Millennials would like to invest in cryptocurrency as part of their retirement plans. Additionally, the survey found that 43% of Zoomers and 47% of Millennials had already put a portion of their digital asset savings out of their retirement plans.
These results are in stark contrast to another survey by the investment manager, which found that just 31% of Gen Xers and 11% of boomers (those born between the mid-1940s and late 1940s) from 1970) were interested in investing in digital technology. foreign exchange through their 401(k) retirement plans.
Bill to remove obstacles
On February 15, Alabama Senator Tommy Tuberville announced that he would reintroduce the Financial Freedom Act to allow American 401(k) retirement plans to gain exposure to cryptocurrencies. The bill, first introduced in the Senate in May 2022, seeks to reverse a US Department of Labor (DOL) policy that directs the type of investments allowed in 401(k) plans, including cryptocurrencies.
In Tuberville’s words, the bill seeks to prevent the DOL from taking enforcement action for people who use brokerage windows to invest in digital assets. “The federal government shouldn’t 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,” added Tubernille.
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 adding Bitcoin to their pension funds.
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Similarly, on February 14, Florida Representative Byron Donalds said he wanted to introduce a bill similar to Tuberville’s in the House of Representatives. Both Donalds and Tuberville are likely to face stiff resistance from members of the Democratic Party, as Senator Elizabeth Warren has repeatedly voiced her concerns about the inclusion of cryptocurrencies in 401(k) plans. Senator Roger Marshall also shares a similar position.
What awaits us?
Since early 2022, the DOL has warned pension fund owners about cryptocurrencies, asking them to exercise extreme caution when dealing with 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 policymakers view this new asset class, especially from a long-term investment perspective.
