Edward Siedle: Your State Pension Is Now Gambling On Cryptocurrency

https://www.forbes.com/sites/edwardsiedle/2022/10/03/yikes-your-state-pension-is-now-gambling-on-cryptocurrency/?sh=2c64f652308a

Your State Pension Is Now Gambling On Cryptocurrency

Forbes

Edward Siedle

Contributor

Pension forensics expert and record-setting whistleblower award winner

Oct 3, 2022

 

Legendary investor Warren Buffett says “cryptocurrencies basically have no value and don’t produce anything.” Yet, according to a recent study, 94% of America’s state and local government pensions—often regarded as the dumbest institutional investors in the world by Wall Street—are gambling on cryptocurrencies. 

If you are a participant in a state or local government-sponsored pension fund, then a portion of your hard-earned retirement savings is likely invested in cryptocurrency or a cryptocurrency-adjacent enterprise. According to a 2022 study published by the CFA Institute, 94% of state and government-sponsored pension funds are invested in one or more cryptocurrencies despite the obvious risks. The attraction to this high-risk asset class is largely driven by the perception that cryptocurrencies have delivered spectacular returns over the last 12 years. Never mind that legendary investor Warren Buffett says “cryptocurrencies basically have no value and don’t produce anything,” America’s public pensions—often regarded as the dumbest institutional investors in the world by Wall Street—think they’re smarter than Buffett and are eager to gamble on cryptocurrencies. (Likewise, Buffett’s repeated warnings about private equity and hedge funds have long been ignored by public pensions.) 

According to Anessa Allen Santos, a Florida attorney and Special Magistrate who specializes in blockchain and fintech, one glaring reason why no pension fund should be toying with cryptocurrencies right now is “the rapid increase in regulatory hostility exercised without restraint toward cryptocurrency issuers by several federal administrative agencies.” 

Attend any meetup, conference or gathering for cryptocurrency, blockchain, fintech, NFTs or the metaverse and you’re sure to hear grumbling about the lack of regulatory guidance coined as regulatory uncertainty, Santos observed. In reality, several federal agencies have issued an abundance of regulations that grant these agencies increasing latitude to bring civil enforcement actions and criminal charges resulting in a legal framework overtly hostile to the industry, she says. For example, the SEC’s position under both the Trump and Biden administrations is that nearly every cryptocurrency ever released is an unregistered public offering of securities. The SEC is so aggressive about prosecuting unregistered digital asset securities that they have dedicated an entire webpage to listing Crypto Assets and Cyber Enforcement Actions that can deter even the most diligent blockchain entrepreneur. Although the SEC has recently been accused of “selective enforcement” of the regulations against unpopular digital asset issuers and exchanges, the more likely explanation, says Santos, is that the SEC simply lacks the resources to prosecute all the schemes they’d like to target. Consequently, how any pension plan could ever justify investing in cryptocurrencies that are likely to be deemed unregistered securities or exchanges is beyond the pale.

In the past, the SEC and CFTC have made non-binding statements that BitcoinBTC 0.0% and EthereumETH 0.0% are not securities, but are commodities subject to CFTC regulation and oversight for instances of fraud or manipulation in spot markets, and for commodity pools, futures contracts, and other derivatives. Santos believes, given the choice, the industry would generally prefer to be regulated by the CFTC rather than the SEC because of the belief that CFTC compliance is less onerous. For this reason, most blockchain developers try to model their projects after Bitcoin and Ethereum which have successfully avoided an SEC smackdown to date. However, due to recent changes in regulations across a bevy of jurisdictions worldwide, these models no longer provide the safe harbor they once did. Moreover, with the CFTC’s recent formation of the Office of Technology Innovation designed to focus on financial technology, she anticipates a flood of enforcement actions charging staking pools as unlicensed commodity pool operators. As a result, she believes pension funds caught investing in these unlicensed financial products may find themselves the subject of class action lawsuits that would be justified under the circumstances.Here’s How Old School Investing May Just Protect Your Retirement

To further complicate matters, if a crypto-commodity serves as a generally accepted payment alternative to the dollar—like Bitcoin—then it will also be regulated by the Financial Crimes Enforcement Network (FinCEN). The sister agency to the SEC and the CFTC, FinCEN oversees the administration and enforcement of the Bank Secrecy Act (BSA) that regulates financial institutions, dealers in precious metals and gems, and money transmitters, among others. The cost of BSA compliance is steep, says Santos, and it extends not just to regulation by FinCEN, but to each state financial regulator as well, resulting in a 51-jurisdiction compliance quagmire that has incentivized more than a few legitimate blockchain companies to start their startup somewhere else. Although Wall Street is more familiar with this agency’s zero-tolerance policy for error, young innovators are not. They are falling like dominos before a hurricane to FBI dawn raids complete with tactical vehicles and weaponized drones for selling Bitcoin for a profit or a fee without a license, according to Santos. FinCEN enforcement actions involving cryptocurrency usually focus on the failure to implement an effective anti-money laundering program compliant with BSA requirements. The challenge, however, says Santos, is that FinCEN has made no statement describing the factors that determine when a cryptocurrency has gained such widespread acceptance as a means of payment that transmission of it requires registration and licensure. Pension funds and their operators are likewise regulated by FinCEN and must comply with the BSA. Thus, they must take note of this patent ambiguity, and failure to recognize this regulatory gap in their investment strategy is almost certainly a violation of the fiduciary duties owed to plan participants, in her view.

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Edward Siedle, Pension forensics expert and record-setting whistleblower award winner, is a former SEC attorney, investment banking and securities industry professional, and longtime Forbes writer. He is the nation's leading expert in forensic investigations of money managers and pensions, focusing upon excessive and hidden investment fees and risks, conflicts of interest and wrongdoing. He was named as one of the 40 most influential people in the U.S. pension debate by Institutional Investor Magazine for 2014 and 2015. His preliminary report on his forensic investigation of STRS, The High Cost of Secrecy, was released June 7, 2021.