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The Ontario Securities Commission (OSC) refused to approve a prospectus for a proposed Bitcoin investment fund, citing the lack of regulation in the fledgling Bitcoin market, along with custody and liquidity issues.

In a decision, the OSC indicates that it refused to issue a receipt for a prospectus for the proposed Bitcoin Fund, which sought to invest directly in Bitcoin, saying, “[I]t appears that it is not in the public interest.” The fund would have been managed by 3iQ Corp.

The OSC’s decision grapples with the issue of “whether an investment fund that invests substantially all of its assets in bitcoin should be offered to the public, including to retail investors.”

According to the ruling, OSC staff are concerned that “bitcoin is a novel asset currently in its nascent state,” and that an adequate regulatory infrastructure needs to develop around it “before it can be considered an appropriate underlying asset for an investment fund available to the public.”

The commission indicates that regulatory staff have “significant market integrity concerns regarding the trading of bitcoin that make it an unsuitable asset for a retail investment fund.”

Among other things, they point out that the cryptoasset market is “particularly vulnerable to market abuse and manipulative behaviour” and that it’s “inherently vulnerable” to fraud and cybercrime. The decision also says trading is fragmented across platforms that raise numerous investor protection concerns, adding that custody in this market is another major concern.

3iQ Corp. aimed to assuage these concerns, unsuccessfully, in its own submissions to the commission. The OSC’s decision acknowledged that the fund manager has “clearly invested significant resources” in attempting to mitigate the risks for retail investors. However, as Raymond Chan, acting director
of Investment Funds & Structured Products wrote in the decision, “There is currently no compelling evidence that the manager’s processes and controls for the operation of the fund […] will be effective in mitigating my concerns regarding the valuation and safeguarding of fund assets and the risk of the fund’s audited financial statements not being filed.”

The commission also found that “bitcoin is an illiquid asset,” and that a fund that invests in it would violate restrictions on holding illiquid assets.