May 5, 2022

Senators Deride Firm's Decision to Include Bitcoin in 401(k) Plans

Steven Lofchie Commentary by Steven Lofchie

Senators Elizabeth Warren (D-MA) and Tina Smith (D-MN) challenged Fidelity Investments to defend its recent decision to allow investments in Bitcoin in its 401(k) investment plan menu, stating that Bitcoin and other digital assets may be too risky an investment for retirement funds.

In a letter to Fidelity's CEO, Senator Warren and Senator Smith questioned the justification of the firm's decision to allow Bitcoin in 401(k) plans, expressing concern over the high risk of fraud, theft and investor losses. The Senators suggested that Fidelity's decision could have resulted from possible conflicts of interest, given Fidelity's cryptocurrency involvement, which included the establishment of a Bitcoin mining operation.

The Senators also questioned whether Fidelity was acting in its customers' best interests, saying that Fidelity had ignored DOL warnings to exercise extreme caution in offering cryptocurrencies in retirement plans.

Finally, the Senators posed several questions addressing (i) the warnings issued by DOL on digital assets in retirement plans, (ii) the specific risks and regulatory uncertainty presented by Bitcoin, (iii) the fees involved in Bitcoin transactions, (iv) Fidelity's connection to cryptocurrency mining and (v) Fidelity's conflicts of interest. The Senators asked Fidelity to respond to these questions by May 18.

Commentary

When President Biden issued an extensive Executive Order on Digital Assets, many in the digital asset industry hoped that the Federal Government would develop and implement a more supportive approach to the industry - ideally by proposing a workable system of disclosure rules for the distribution of such assets and facilitating the development of digital asset infrastructure. That hope appeared somewhat over-optimistic as the Order did not provide any clear direction, with half of the Order announcing the President's intention for the U.S. to become the "global leader" in digital assets, and the other half denouncing the industry as one that grew by "largely defying existing laws and regulations."

To the extent that President Biden's message was heard by his administration, it was the part about defiance of laws. Since the publication of the Order, Senators Warren and Sherrod Brown, now joined by Senator Smith, the DOL, and SEC Chair Gensler (who substantially increased the size of the crypto enforcement staff), seem absolutely intent on shutting down the digital asset industry.

Participants in the industry had better believe that "what does not kill them will make them stronger," as the knives seem clearly out.

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