Page 42 - Investment Advisor - November 2023

ComPLIANCe CoACH

By Thomas D. Giachetti

What to Know and do now About Bitcoin

Here are the key regulatory and compliance issues that advisors must address.

ith recent developments are suitable for the client. Bitcoin is
in the regulatory, legal and historically, and notoriously, volatile,
W compliance landscape sur- and advisors should assess whether an
rounding bitcoin and a spot bitcoin ETF, investment in bitcoin (or any cryptocur-
some investment advisors may be con- rency) is consistent with a client’s long-
sidering how to potentially integrate bit- term objectives and risk tolerance.
coin — or other cryptocurrencies — into • Disclosures and acknowledge-
client portfolios. ments: Advisors should request that cli-
This piece is intended to update the ents execute an acknowledgement that,
regulatory landscape and inform advi- among other disclosures, makes clear
sors how to fulfill their compliance and that cryptocurrencies are considered to
fiduciary obligations should they deter- into a spot bitcoin ETF. be speculative, and that unlike conven-
mine to integrate bitcoin, such as the The ruling, which vacated an SEC tional currencies issued by a monetary
current Grayscale Bitcoin Trust (GBTC) order denying Grayscale’s spot bitcoin authority, cryptocurrencies are gener-
or anticipated ETFs that will invest in ETF application, requires the SEC to ally not controlled or regulated, and that
bitcoin or other cryptocurrencies, into consider the application anew. The rul- their price is determined by the supply
client portfolios or assist a client with a ing could have far-reaching implications and demand of their market.
requested purchase thereof. for other spot Bitcoin ETF applications. • Brochure: Advisors considering
This column is not and does not serve As of Aug. 30, the SEC is consider- proactively incorporating crypto into
as an endorsement of bitcoin, or any other ing 14 such applications, including ones client portfolios should amend their
cryptocurrency. Advisors must separately from financial giants like BlackRock, brochure (i.e., Form ADV Part 2A) to
educate their investment professionals WisdomTree and Invesco. include language that similarly describes
and clients about cryptocurrencies before Analysts have predicted that the odds the risks associated with bitcoin and
integrating them into client portfolios or of a spot bitcoin ETF approval are 75% in how the advisor can integrate crypto
assisting with a client-directed purchase. 2023 and 95% in 2024. With the imminent into a client’s portfolio, such as on a dis-
Bitcoin is considered to be specula- approval of a spot bitcoin ETF, investment cretionary/non-discretionary basis, or at
tive, and the Securities and Exchange advisors could determine to consider add- specific client direction.
Commission has been aggressively ing a bitcoin ETF to client portfolios. RIAs are fiduciaries and are required
reviewing cryptocurrency investments However, doing so comes with com- to act in the best interests of their cli-
during examinations. pliance implications, and it is critical for ents. As such, they bear the responsibil-
Depending upon the scope of an advisors to conduct appropriate due dil- ity to: Conduct thorough due diligence,
advisor’s assistance with/use of cryp- igence to confirm that such integration including understanding bitcoin’s market
to (employing it as a courtesy/client- is reasonable and suitable for clients. dynamics, its correlation with other assets
directed accommodation versus using Investment advisors registered at the and the technology behind it; educate cli-
it as an asset class in client portfo- federal and state level are required to ents so they can better understand both
lios), both applicable, clear and con- maintain a robust compliance program. the risks and potential rewards of invest-
spicuous Form ADV disclosure and a Advisors who want to integrate a bitcoin ing in bitcoin or other cryptocurrencies;
separate acknowledgement executed by ETF, or another type of crypto invest- and disclose the fees, both the underlying
the client are strongly encouraged. ment, should update their policies and investment’s fees and the advisor’s fee,
On Aug. 29, the U.S. Court of Appeals procedures to address the risks and chal- associated with such an investment.
for the District of Columbia Circuit lenges that bitcoin presents, including:
ruled in favor of Grayscale Investments • Suitability: Before proactively pur- Thomas D. Giachetti is chairman of the
in Grayscale’s lawsuit against the SEC chasing a bitcoin ETF for clients — versus Investment Management and Securities
for denying the company’s application only per client request/direction — advi- Practice Group of Stark & Stark. He can be Adobe Stock
to convert its Grayscale Bitcoin Trust sors should confirm that these assets reached at [email protected].

40 Investment AdvIsor November 2023 | ThinkAdvisor.com