Crypto ETFs In Your Traditional Brokerage Account… What Could Go Wrong?

On January 10, 2024, the Securities and Exchange Commission (“SEC”) released a statement announcing the approval of the listing and trading of spot bitcoin exchange-traded product shares on national securities exchanges. This move by the SEC comes after years of heated debate between financial professionals, regulators, members of Congress, and the general public over the regulation of cryptocurrencies and other digital assets. The SEC’s approval of crypto ETFs signals the first step in the widespread adoption of cryptocurrencies in traditional investment portfolios, but are the necessary guardrails in place to ensure investors are protected?

In the statement, the SEC noted that sponsors of crypto ETFs are required to provide investors with full and fair disclosures about the products being offered, similar to the requirements on sponsors of traditional investment products. Further, the SEC explained that the standards for recommending and selling traditional investment products, like Regulation Best Interest and fiduciary duties, will also apply to the recommendation and sale of crypto ETFs as well. While these requirements represent a solid foundation for the protection of investors, the experienced Securities Crypto Fraud Law attorneys at Malecki Law feel investors are still at risk when investing in crypto ETFs and digital asset private placements. Malecki Law has represented some, if not the first, crypto-related securities investors successfully in FINRA arbitration.

Exchange Traded Funds, or ETFs, are funds that trade on national securities exchanges, generally track a basket of securities, and sometimes viewed as safer investments because they are inherently diversified. However, cryptocurrencies, like Bitcoin, have a remarkably brief history compared to traditional investment products, like stocks, bonds, or ETFs. Cryptocurrencies are known to be extremely volatile, meaning they can experience large price swings in a short period of time, and have, in part, been historically used for nefarious purposes, such as money laundering and illicit online purchases. While being on an exchange may “seem” regulated, the underlying asset, Bitcoin, is still largely unregulated, subject to fraud risk, and can be volatile to the point of no return. Investors must stay hyper vigilant about the risks associated with crypto ETFs that are recommended and sold to them. These ETFs are highly speculative. If you have suffered investment losses in crypto ETFs or cryptocurrency-related private placements, the New York City Securities Digital Asset Fraud Attorneys at Malecki Law may be able to help you recover your losses.

The SEC approved eleven crypto ETFs in total, including the Grayscale Bitcoin Trust (GBTC), the Bitwise Bitcoin ETF (BITB), the Invesco Galaxy Bitcoin ETF (BTCO), and the Fidelity Wise Origin Bitcoin Trust (FBTC), among others. Although some of the crypto ETFs are associated with well-known financial firms, like Invesco and Fidelity, most of the approved crypto ETFs are offered by smaller firms with seemingly less experience in the securities industry. Additionally, although these new investment products are packaged as “ETFs,” which are generally seen as safer investments, investors should be diligent in consulting their stockbrokers and financial advisors about the risks associated with any crypto ETF they purchase to ensure the products are in their best interest.

Although these are “new” takes on crypto securities, brokerage firms have been selling crypto-based products through private placements with disastrous results. For example, in November 2023, the SEC announced charges against SafeMoon LLC and its creator, Kyle Nagy, related to the unregistered sale of SafeMoon, a crypto asset security. SafeMoon LLC reached a market capitalization of over $5.7 billion before the fraudulent scheme was discovered. Moreover, clients that suffered losses in crypto based private placements sold by limited purpose brokerage firms, like Grayscale, Galaxy, and Bitwise, have been successfully represented in FINRA arbitration by our firm, including both high monetary settlement and forgiveness of onerous capital commitments. If your broker or advisor has sold you cryptocurrency products that suffered losses or are drowning in capital calls, you should consult a Crypto Fraud Securities Lawyer, like the ones at Malecki Law in Downtown Manhattan with the ability to help clients nationwide while following local rules.

The SEC’s approval of crypto ETFs is likely just the first step in the wider adoption of cryptocurrency and digital asset-based securities products. Financial firms have already begun pressuring the SEC to approve similar Ethereum ETFs, although the SEC appears hesitant to grant the same approvals for Ethereum as it has for Bitcoin. As the adoption of cryptocurrencies in traditional brokerage accounts grows, investors must remain especially aware of the risks and features associated with the crypto-related products they purchase from stockbrokers and financial advisors.