Advisors Expect Fresh Worries From Spot Bitcoin ETFs
Adding a crypto fund to client portfolios will bring a host of advisory challenges.
With less than two weeks remaining before the Securites and Exchange Commission is expected to rule on the first spot bitcoin ETF in the U.S., financial advisors should be considering the potential compliance and due diligence issues that will come with such a game-changing event, observers say.
“Financial advisers or brokerage reps may be required to warn their clients about bitcoin’s sometimes unsettling volatility, and financial institutions might also advise or require their representatives to recommend that shares of the spot bitcoin ETF should only make up a small share of their clients’ portfolio," said Frank Corva, senior analyst for digital assets at Finder.com.
Corva, and others who have monitored the pending ruling by the SEC warn that a spot bitcoin exchange-traded fund should be viewed as more than just another investment to be added to clients’ portfolios.
“The SEC has been incredibly inconsistent in its messaging around regulation for bitcoin and the broader digital asset ecosystem,” Corva said. "This has made it difficult for those in the bitcoin industry or those who work with bitcoin-related products to remain compliant.”
Spot Bitcoin ETF Challenges
Andy Chang, founder and chief executive of The Credit Review, said a spot bitcoin ETF will require enhanced due diligence related to custody and will force advisors to evaluate the integrity of price feeds and identify counterparty risks.
“There’s the need for enhanced client communication—and clear explanations regarding the volatility and risk will be necessary to ensure it fits into the client's investment plan and risk tolerance,” he said.
“Advisors and brokerages should proactively reassess their compliance procedures and reach out to their legal and compliance departments to prepare for these potential developments,” he added.
Securities attorney Min Hwan Ahn with the Law Office of Ahn & Sinowitz said a spot bitcoin ETF should lead advisors to reconsider investment suitability.
“Advisors need to assess whether a bitcoin ETF harmonizes with their clients’ risk appetite and investment targets,” he said. “Given the considerable volatility of cryptocurrencies, they may not cater well to all investor profiles.”
There are more than a dozen filings before the SEC seeking approval to launch a spot bitcoin ETF. The SEC is scheduled to rule by Jan. 10 on the first filing by ARK Invest, and could approve multiple ETFs simultaneously.
“If bitcoin ETFs hit the scene, it's not just business as usual,” said Nathan Jacobs, senior researcher at The Money Mongers.
“This will be a new challenge for advisors and brokers to really understand this space and guide their clients through it smartly and safely,” he added. “It's definitely going to stir the pot for financial advisors and brokerage folks, and they'll need to get really clued up on bitcoin because it's a whole different beast compared to traditional stocks.”
Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter
