Responding to retail investors’ pent-up desire to keep their money in something other than a sock, 3iQ Corp. (3iQ) designed a non-redeemable investment fund (Fund) to let them store it on the block. But in a decision released earlier this month, the Acting Director (Director) of the Investment Funds and Structured Products at the Ontario Securities Commission (OSC) declined to issue a receipt for 3iQ’s prospectus. This appears to be the first time that Canadian securities regulators have considered whether or not to permit a public offering of a fund that would invest substantially all of its assets in a cryptocurrency.

The Director declined to issue a receipt for the fund, mainly because in his view the operational risks associated with a fund investing in bitcoin weren’t sufficiently mitigated. He noted:

“Bitcoin and other cryptoassets create novel challenges in striking a balance between product innovation that may promote fair and efficient capital markets and the protection of investors. In my view, because of the lack of established regulation for the bitcoin market at this time, an investment in the Fund raises a number of investor protection issues, notably, issues concerning the valuation, safeguarding and liquidity of bitcoin.”

He also accepted OSC staff’s position that bitcoin is an illiquid asset and, therefore, he had to refuse a receipt for the Fund’s prospectus because it did comply in a substantial respect with the restriction in National Instrument 81-102 Investment Funds (NI 81-102) against the holding of illiquid assets. Under NI 81-102, an “illiquid asset” means a portfolio asset that cannot be readily disposed of through market facilities that meet certain criteria. The Director accepted that the term “market facilities” does not require that an asset can be readily disposed of through a regulated exchange or marketplace. But he agreed with staff that “market facilities” implies some form of established and mature trading facility or network to promote a robust valuation of a fund’s assets, and that such a facility does not exist yet for bitcoin.

It will be interesting to see if other securities regulators in North America take a similar approach and also whether fund managers are able to take the lessons learned from this decision and effectively address the investor protection concerns that lie at the heart of the decision.