Sep 17. 13:25
NYDIG Bitcoin Strategy Fund Files for Deregistration
The Fund's investment objective is to achieve capital appreciation by investing in Bitcoin futures contracts. Back in May 2020, we highlighted BTCNX as an early example of the potential synergy between cryptocurrencies and the closed-end interval fund structure.
REASONS FOR DEREGISTRATION
Stone Ridge did not publicly state a rationale for deregistration. BTCNX's Board of Trustees voted to liquidate the fund quietly, without any preamble or shareholder voting requirements, and will return capital to shareholders.
Earlier this year they filed the Stone Ridge Bitcoin Strategy Fund shortly followed by the NYDIG Bitcoin Strategy Fund II, both open-end mutual funds with similar investment strategies to BTCNX. Neither fund prospectus references BTCNX, and outside of a different fund structure, the major changes involved half the management fee charged by BTCNX plus the ability to use 25% more leverage.
Performance may have been a driver. While BTCNX returned an impressive 313.74% to shareholders between October 2020 and April 2021, Bitcoin itself grew about 424% over the same period. Cutting expense ratios and boosting leverage could help Stone Ridge achieve better performance with the new funds as Bitcoin looks to rebound from its May crash.
REDUCING INNOVATION RISK WITH INTERVAL FUNDS
At a time when firms ranging from relatively new players like Grayscale to incumbents like Fidelity are lobbying the SEC for guidance on the elusive Bitcoin ETF approval, when crypto trading platform Coinbase is staging a public spat with the SEC over alleged selective enforcement, and when the EU is tightening the screws on crypto privacy advantages just as El Salvador recognizes Bitcoin as legal tender, describing the regulatory landscape for digital currencies as "chaotic" would be a massive understatement.
Meanwhile, BTCNX went from filing to effective in just 60 days. Adviser Stone Ridge Asset Management - who managed roughly $11b in total assets as of June 2021 - did not seek to make a marketing splash upon launching the Fund. Instead they launched a crypto fund within the well-regulated closed-end interval fund structure, and quietly worked on partnerships with other regulated sectors like consumer banking and property & casualty insurance with little to no public pushback from the SEC.
The takeaway is that interval funds greatly limit innovation risk. While recently growing in popularity, and offering retail investors new access to private market investments, interval funds are still registered under the 1940 Act. That means baked-in investor protections and disclosure requirements that attract relatively little SEC scrutiny. Compare that to crypto's regulatory challenges, or the SEC signaling to require greater SPAC disclosures, or the SEC considering banning payment for order flow (Robinhood's core revenue stream), or even the U.S. Senate gearing up to remove a critical tax advantage from ETFs. Interval funds are pretty boring when it comes to regulator drama, and that's a major advantage.
Interval fund registrations are almost never rejected by the SEC; one of the only examples is the Cipher Technologies Bitcoin Fund, which the SEC rejected in 2019 on the grounds that buying Bitcoin directly violated '40 Act rules because Bitcoin is not (perhaps, not yet) recognized as a security. BTCNX, by contrast, did not challenge the definition of a security. They didn't look to validate a non-fiat currency. They just invested in established futures contracts through an existing fund structure, allowing them to focus on fundraising instead of lobbying regulators.
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