I stopped writing about Bitcoin (BTC) in October 2020 because by then most people realized that, as an investment, BTC is foolish at best. My last article on the subject was about Fidelity Investments which was an outlier because it was a cheerleader for cryptocurrency.
At that time Fidelity was proposing to allow its brokerage customers to keep their BTC in Fidelity’s custodial “vault” and see their holdings valued on their Fidelity statement. I suggested then that by just taking custody of its customers’ BTC, Fidelity might be considered a “facilitator” of its purchase. Adding crypto holdings to the statement of mainstream investments might give people the idea that BTC is a mainstream investment, which it is not.
By October 2020 most of the predictions made by BTC self-styled experts in 2016-2018 had failed to come to pass. Banks had not been disrupted. The US dollar and other fiat currencies were still accepted virtually everywhere. There was not a BTC ATM on every street corner. No real change in the world banking system was on the horizon. Much of the hype in 2020 came from the same people who had been hyping BTC since 2016 and earlier.
My article was in response to a report published by Fidelity’s Director of Research that suggested that BTC was a “potentially useful” asset for “uncorrelated return-seeking investors”. The report said that “in a world where benchmark interest rates globally are near, at, or below zero, the opportunity cost of not allocating to bitcoin is higher.”
Stock brokerage firms that merely execute their customers’ orders to buy and sell owe very little duty toward those customers. They are expected to handle the execution and bookkeeping by industry rules and practice, but little more. Consequently, these “discount” brokerage firms have little liability if a customer loses money because they invested incorrectly.
The report from Fidelity’s Director of Research in 2020 further suggested that bitcoin’s market capitalization “is a drop in the bucket compared with markets bitcoin could disrupt.” As I noted at the time, that report certainly sounded to me like a “buy” recommendation for BTC.
When a stock brokerage firm issues a recommendation more rules come into play. There must be a “reasonable basis” underlying the recommendation. The rules governing research reports require more than a crystal ball look into the future.
Get Rich Quick?
Then as now, there is no real data about BTC for anyone to research. You cannot analyze BTC in any traditional way. They are merely a few lines of computer code, generated by a computer. You can plug in and get rich but that is not going to disrupt the global banking system.
Fidelity’s Director of Research based his recommendation to buy BTC, not on facts, data, or any traditional analysis, but rather on his speculation that BTC would result in a titanic disruption in the global financial system. And that is what BTC is, not an investment but speculation.
That fact is important because last week Fidelity announced that beginning mid-year it will permit financial advisors managing 401(k) retirement plans to invest in BTC as well. Fidelity has about 23,000 of these advisors on its platform. If only 10% of those purchase BTC in the amount of 10% of the funds they are managing, the price of BTC is likely to sky-rocket.
Congress created 401(k) plans under the Employee Retirement Income Security Act of 1974 (ERISA). Managers of ERISA plans are held to a fiduciary standard and are expected to invest the funds entrusted to them as a “prudent” person would. No one considers speculation in a retirement account to be “prudent”.
DOL Says NO
Congress assigned regulation of these retirement plans to the Department of Labor (DOL). There are about 800,000 different private pension plans in the US covering about 140 million people. Total assets held by these plans exceed $10 trillion, so it is pretty easy to understand that this is a big business.
Fidelity has been planning this move for some time. It has been inching up to accepting crypto in 401(k) accounts for at least 2 years. What is interesting here is that just about one month before its announcement, the DOL essentially told Fidelity, and all ERISA account advisors, not to purchase crypto in 401(k) accounts.
On March 10, the DOL issued Compliance Assistance Release No. 2022-01(CAR) on the subject of “401(k) Plan Investments in “Cryptocurrencies”. The DOL is aware that firms were marketing investments in cryptocurrencies to 401(k) plans as potential investment options for plan participants. The CAR lays out the DOL’s reasoning why cryptocurrencies do not belong in retirement plans.
The first reason the CAR lists is because an investment in cryptocurrencies is highly speculative. Highly speculative investments are never prudent for a 401(k) retirement plan.
No one asked Fidelity to respond to the CAR, but they did. In this case, we get a rare glimpse of Fidelity’s rationale supporting this bold move to offer BTC to ERISA accounts and account managers.
While Fidelity says that it understands that the CAR “effectively deems the selection of cryptocurrencies for investment in a 401(k) plan to be imprudent” it suggests that the DOL can’t possibly mean ALL cryptocurrencies. Fidelity suggests further study and guidance for the DOL as to which cryptos may be OK for 401(k) plans and which are not.
Notwithstanding its request for more clarity and its request that the CAR is withdrawn, Fidelity’s response can only be read as an admission that it understands the DOL means that crypto of any kind does not belong in a 401(k) or any retirement plan.
Fidelity also argues that it is not specifically designating BTC or any crypto as investments that they are offering to these plans. If a plan manager wants to add some BTC to the portfolio, Fidelity will guide the manager to a different landing page, where the purchase will be made through a different Fidelity company, not the ERISA plan funnel.
That argument is unlikely to hold water as what the DOL was complaining about in the first place, was people marketing crypto to these retirement plans. However Fidelity books these trades, it is still Fidelity’s cheer-leading for BTC that is causing those trades to occur.
To be clear, even though the primary regulator of these 401(k) plans has said no, Fidelity has gone ahead and decided that it will facilitate the purchase of BTC in these accounts. The lawyers and compliance officers who gave Fidelity the green light, need to stand up and explain themselves.
In its most recent research, (April 2022) Fidelity asserts that BTC is an “aspirational store of value”. Fidelity’s argument for BTC is specious at best, but that does not matter. In that report, Fidelity specifically acknowledges that BTC is a speculative investment. Notwithstanding, Fidelity continues to target retirement fund administrators with positive commentary about BTC.
I would suspect that the DOL was addressing Fidelity when it issued the CAR. As any lawyer will tell you, Fidelity is essentially telling the regulator to shove it. Fidelity knows that the CAR has not been withdrawn. In my experience, regulators hate to be ignored.
I also suspect that the DOL has a contingency plan for this. It has already gotten support from the AFL-CIO which has specifically and publicly supported the issuance of the CAR. The CAR alone will dissuade some of the fund administrators Fidelity is targeting, but Fidelity apparently intends to offer crypto to any retirement account that wants it.
The DOL also has the benefit of several US Supreme Court decisions that support the idea that ERISA accounts require “prudent” investments and that plan fiduciaries need to help eliminate “imprudent” investments. As Fidelity can be shown to be trying to influence plan administrators to purchase imprudent investments, some courts might just agree that Fidelity has stepped into a fiduciary relationship with the plan investors.
I suspect that any court that looked at the facts presented here might support a cease-and-desist order against Fidelity. I would not be surprised if it came from the securities regulators in Fidelity’s home state of Massachusetts.
I cannot for the life of me figure out how Fidelity got itself into this mess. Fidelity enjoyed a reputation as a company that sold mutual funds to mom-and-pop investors. There are more than 25 million people in the 401(k) plans that Fidelity services. Why would Fidelity go against the DOL for the right to sell highly speculative investments that most of those people would never want in their retirement plan?
Sooner or later, I suspect someone will write a book about Fidelity’s attempt to put lipstick on the pig that is BTC and pawn it off on retirees. The SEC has been threatening to hold compliance directors responsible for allowing practices that harm investors. If Fidelity moves ahead, as I suspect this would be an ideal opportunity for the SEC to make a statement and demonstrate that they are serious and ask the compliance director at Fidelity to explain himself.
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