One step forward, one step back for use of crypto in retirement accounts

'Crypto is on a journey from a niche asset class to a mainstream asset class,' says an advisor.

It was one step forward, one step back this week toward a world in which cryptocurrency investments start popping up widely in retirement accounts.

ForUsAll, a firm that helps retirement plans offer cryptocurrency investments to their participants, suffered a setback Tuesday when the U.S. Court of Appeals for the District of Columbia dismissed the firm’s lawsuit against the Department of Labor over its March 2022 crypto guidance.

The agency warned plan fiduciaries to use “extreme care” before giving workers the option of investing their retirement savings in crypto. ForUsAll alleged that the guidance crimped its business and that the DOL overstepped its authority in issuing it. The court ruled in favor of DOL, saying in part that the guidance was not a final agency action and not subject to judicial review.

But another decision Tuesday by the D.C. appeals court was better news for the prospects for crypto investments. The court overturned the Securities and Exchange Commission’s rejection of Grayscale’s spot bitcoin ETF application, calling it “arbitrary and capricious” because the agency has approved exchange-traded funds based on bitcoin futures. The SEC is again mulling the Grayscale bitcoin ETF as well as similar products from other financial firms.

After the back-and-forth in the D.C. court, crypto has advanced, experts say.

“We’re not one day away from it being in retirement portfolios broadly but we’re making progress,” said Matt Hougan, chief investment officer at Bitwise Asset Management. “Crypto is on a journey from a niche asset class to a mainstream asset class.”

Theresa Morrison, a partner at the investment advisory firm Beckett Collective, sees steady gains for wider use of digital assets.

“We’re not running toward it,” Morrison said. “We’re moving toward it.”

If the SEC approves bitcoin ETFs, it could pave the way for the use of crypto for retirement savings despite the DOL’s stern admonition that remains standing.

“One agency allowing it takes a great deal away from the risk,” said Adam Blumberg, co-founder of Interaxis, a firm that educates financial professionals about cryptocurrency. “It’s more likely there will be exposure to crypto in retirement accounts.”

Whenever it is that a bitcoin ETF is approved, it may take a while for its popularity to ramp up because the financial industry faces a learning curve, Morrison said. Advisors will have to “upskill” to be able to evaluate the underpinnings of bitcoin ETFs before recommending them.

“You need to have an understanding of the technology in order to make that determination,” she said. “This is new knowledge. That’s why regulators are going slowly.”

A bitcoin ETF would provide price exposure to bitcoin without requiring investors to own it. That could be the breakthrough that makes bitcoin more of a household investment, Hougan said. He likened it to the advent of gold ETFs, which gave everyday investors exposure to the commodity.

“It was only after it got an ETF that it entered polite conversations,” Hougan said. “Crypto is going through the same maturation.”

Given the price fluctuations for crypto, there’s still a fair amount of wariness about it in the financial marketplace, including from retirement investors.

“There aren’t as many people clamoring to put crypto in retirement accounts as there were a couple years ago,” Blumberg said.