Safety: Regulations
This series of articles are intended to shine a light on all the bullshit out there about digital currency investment in your self-directed IRA.
What is happening with potential regulations surrounding digital currency?
March 10, 2022, the Department of Labor announced Compliance Assistance Release (CAR) 2022-01 which relates to 401(k) plan investments in cryptocurrencies.
The Department of Labor (DOL) also issued a press release. The nuts and crux of CAR 2022-01 is to inform plan fiduciaries of 401(k) plans to exercise “extreme care” in considering cryptocurrencies as part of a 401(k) plan investment option for plan participants. This press release came one day after the White House released an executive order on digital currency.
THE KEY TAKEAWAYS
Investigations are coming. DOL states that it “expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments.” 401(k) plan menus may have fiduciary risk. CAR seems primarily focused on cryptocurrencies as part of the “menu” of a 401(k) plan, but at the end of the release the DOL states that plan fiduciaries that offer them as investment options or allowing them through brokerage windows should expect to be questioned about how they determined to offer this option with prudence. The
DOL does not explain how they view the oversight. Presumably the DOL views the menu options of investments to make available as a fiduciary function. IRAs are not mentioned. Cryptocurrencies are primarily held in IRAs, not 401(k) plans. IRAs are not in the DOL’s jurisdiction, so it comes as no surprise that IRAs were not mentioned. Self-directed IRA custodians, however, should monitor the custodial risks and valuations of guidance to be imposed. No distinction made on type of cryptocurrencies. DOL makes no distinction among assets such as stable coins or non-fungible tokens (NFTs). It is not clear to the extent of the guidance if it will apply to registered investments, such as mutual funds and electronic funds transfers (EFTs) that have exposure to cryptocurrencies or crypto service providers. The DOL lays out the following concerns with digital currency in plans:
■ Speculative – These investments are highly speculative and subject to extreme price volatility.
■ Difficult to make decisions – It is challenging for participants to make informed investment decisions because digital currency can attract inexperienced plan participants with lofty expectations of high returns without appreciating the risks.
■ Implicit stamp of approval – Putting digital currency in a 401(k) plan is effectively telling participants that knowledgeable investment experts have approved the digital currency option.
■ Custodial risks – Because of the way cryptocurrencies are held, they are vulnerable to hackers and theft.
■ Valuation – Concern about reliability and accuracy of digital currency valuations.
■ Regulation is evolving – As there is increasing use of cryptocurrencies for illegal activities, the regulatory environment is also changing. To what degree or extent regulation will be implemented is still unknown.
Overall, the DOL is trying to discourage the use of digital currency in 401(k) plans for the near future, including the use by registered independent advisors (RIAs).
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