I asked this question
How can cryptocurrency not be an ERISA Prohibited Transaction under the Impartial Conduct Standards? Is Bitcoin different than other types? Does putting Crypto in an ETF fix it?
ChatGPT said:
Great question—cryptocurrency, including Bitcoin, poses serious risks under ERISA’s fiduciary and prohibited transaction rules, especially when evaluated through the lens of the Impartial Conduct Standards (ICS) issued by the Department of Labor (DOL) in the context of the Fiduciary Rule and PTE 2020-02.
Let’s break this down:
🔹 ERISA Fiduciary Duties & Impartial Conduct Standards
Under ERISA, fiduciaries must:
- Act prudently (duty of care)
- Act loyally (duty of loyalty—no self-dealing or conflicts)
- Pay only reasonable compensation
- Not make misleading statements or omissions
The Impartial Conduct Standards, applicable to rollovers and IRA advice under PTE 2020-02, reinforce these duties and apply broadly when fiduciaries recommend or select investments for ERISA-covered plans or IRAs.
🔶 Why Cryptocurrency (like Bitcoin) Often Violates These Standards
- Lack of a prudent process:
- DOL issued Compliance Assistance Release 2022-01 warning fiduciaries to “exercise extreme care” before including crypto in retirement plans.
- Crypto’s volatility, speculative nature, custodial risks, and regulatory uncertainty raise prudence red flags.
- Duty of loyalty / potential for conflicts:
- Many crypto providers (e.g., exchanges, fund managers) stand to profit from high fees or self-dealing structures.
- Fiduciaries recommending crypto could be conflicted if they share revenue, hold equity in crypto firms, or lack independence.
- Reasonable compensation:
- Many crypto platforms and funds (e.g., Grayscale Bitcoin Trust) charge excessive fees relative to the risk/return profile—potentially violating the “reasonable compensation” standard.
- Risk of misleading statements:
- Marketing crypto as “hedges against inflation,” “digital gold,” or “safe diversification” can be misleading if not backed by robust fiduciary analysis.
⚖️ Prohibited Transaction Risk
Crypto holdings may involve:
- Conflicted compensation (e.g., revenue-sharing with crypto platforms),
- Use of plan assets in self-dealing by fiduciaries or related parties,
- Indirect party-in-interest transactions, such as recommending affiliated crypto custodians or ETFs.
This could trigger ERISA §§ 406(a) and 406(b) violations unless a DOL exemption applies—and none exist specific to crypto.
🔹 Is Bitcoin Different from Other Cryptocurrencies?
Yes, Bitcoin is viewed somewhat differently, but it’s not exempt from fiduciary scrutiny:
- Bitcoin is not a security, per SEC Chair Gensler (most others are), which may reduce some regulatory hurdles.
- Bitcoin has longer history, greater liquidity, and institutional acceptance than most altcoins.
- However, its volatility, custodial concerns, and speculative nature still pose ICS and prudence issues under ERISA.
🔹 Does Putting Bitcoin in an ETF Solve the Problem?
Not necessarily. Using a Bitcoin ETF (e.g., BlackRock’s IBIT or Grayscale’s GBTC) addresses some custodial and valuation issues, but fiduciary risks remain:
- Still speculative and volatile—may not meet prudence test.
- High fees (especially with trusts like GBTC) may violate “reasonable compensation.”
- ETF sponsor conflicts (e.g., marketing fees, cross-selling) may still trigger 406(b) violations.
- DOL has not approved any PTE specific to crypto ETFs in retirement plans.
🔍 Key DOL Guidance & Enforcement
- 2022 DOL Crypto Guidance: Warned fiduciaries about crypto’s inclusion in 401(k)s; issued investigative subpoenas to plans considering it.
- ForUsAll v. DOL: Lawsuit over DOL’s crypto warning; DOL defended its authority to flag fiduciary risks.
- Ongoing enforcement: DOL is watching this space closely and likely to bring enforcement actions if crypto is imprudently included in plans.
✅ Summary
| Question | Crypto (esp. Bitcoin) in DC Plans |
| Is it a Prohibited Transaction under ERISA? | Very likely yes unless clearly exempt and without conflicts |
| Does it violate the Impartial Conduct Standards? | Often yes — due to volatility, lack of prudence, high fees, and conflicts |
| Is Bitcoin treated differently? | Slightly, but not enough to justify inclusion |
| Does a Bitcoin ETF fix this? | No — may reduce some risks, but not prudence or ICS violations |
📌 Bottom Line for Fiduciaries
Unless crypto becomes clearly supported by regulatory exemptions, has stable pricing, low fees, and a credible long-term track record in retirement portfolios, its inclusion in ERISA plans is a high-risk move likely to draw litigation and regulatory scrutiny.
The CommonSense 401k Project 