Why Are the Feds So Mad About Bitcoin Retirement Investing?

The Department of Labor and Sen. Elizabeth Warren have strong opinions about Fidelity’s new 401K option


Bitcoin has emerged as an attractive savings option in a time of creeping global inflation and general uncertainty—to say nothing of the situation facing the stock market. Like gold, this scarce digital asset can serve as a hedge against currency depreciation. Despite short-term volatility, bitcoin's long-term price growth has been impressive, with an average annual return of around 98 percent. No wonder so many people would like to set aside at least a small portion of their nest egg into bitcoin.

Well, the government does not like this one bit. Its lackeys will fight tooth and nail to curtail your ability to hold bitcoin as part of a particular kind of tax-advantaged retirement account.

Recently, the asset manager Fidelity announced it would start allowing customers to hold bitcoin as part of their 401K accounts. By the end of the year, the 23,000 companies that use Fidelity to manage retirement accounts (around a third of the $7.7 trillion industry) should have the option of allowing bitcoin investments of up to 20 percent of an individual portfolio.

Citing growing interest from clients, the company states the move is intended to provide a "diverse set of products and investment solutions for our investors," adding that "cryptocurrency is going to shape the way future generations think about investing."

Fidelity has been thinking about cryptocurrency for a long time. It was among the first major investment houses to hire full-time bitcoin analysts, many of whom have gone to spin off their own bitcoin businesses. In 2018, the company opened Fidelity Digital Assets to provide cryptocurrency investment services—like buying, selling, and custody—to institutional clients. Extending 401k bitcoin investments is a logical next step in the company's established history of careful study and service provision.

The Department of Labor probably hasn't been thinking as carefully about bitcoin as Fidelity, but it still has strong opinions on the matter.

In March, perhaps after getting tipped off about Fidelity's plans, the Department of Labor put out a guidance urging 401k plan fiduciaries (like Fidelity) to "exercise extreme care" when considering cryptocurrencies. Citing the Employee Retirement Income Security Act of 1974, which states fiduciaries much act in the financial interests of plan participants when considering 401K investment options, the short document rattled off the normal fearmongering about cryptocurrency: that it is risky, complex, and part of an "evolving regulatory environment" (well, whose fault is that?). In other words, nothing that the crypto-savvy analysts at Fidelity Digital Assets hadn't heard a million times before.

Nevertheless, Fidelity persisted, and proceeded to announce the 401k bitcoin plan later in April. Unfortunately, other firms who may have been exploring bitcoin options for their clients may be spooked by the letter, despite being ultimately nonsensical in terms of fiduciary law and management.

Speaking of persisting, this made Sen. Elizabeth Warren (D–Mass.), that crusader against big banks, hit the roof. She and fellow Sen. Tina Smith (D–Minn.) wrote a blistering letter to Fidelity's CEO, "inquir[ing] about the appropriateness" of the company's new 401k options and demanding answers to such questions that can essentially be paraphrased as "How dare you ignore the Department of Labor!" (In fact, Fidelity did not ignore the Department of Labor, and has already answered many of the questions raised by the Senators in an April 12 letter to the agency.) Department of Labor agents, likewise, have "grave concerns," and have publicly stated their intentions to beat down Fidelity's proposed 20 percent limit, which can be set lower by companies, to a measly 5 percent.

The funny thing here is that it's not clear what exactly the Department of Labor can do about Fidelity's bitcoin plan. Department of Labor functionary Ali Khawar told Barron's that their enforcement authority here is limited to "investigating and litigating" this issue—in other words, it doesn't seem that Department of Labor can ban or prohibit the 401k bitcoin option. This might be why Fidelity decided to brush off the concern trolling of a department that didn't seem to know much about cryptocurrency anyway.

Another peculiarity: people have been holding cryptocurrency as part of a tax-deferred retirement account for a good amount of time. Early adopters have been setting up self-directed IRAs to include bitcoin for many years. By now, the arrangement is so institutionalized that many professional bitcoin IRA companies and services are open to less-engaged investors. You can even get bitcoin exposure in an IRA account managed by a big dog like Vanguard with the Grayscale Bitcoin Trust. Somehow, these people's retirement savings have not imploded.

Fidelity isn't even the first entity to offer 401k functionality. In 2021, Coinbase teamed up with retirement manager ForUsAll to allow workers to squirrel away up to 5 percent of their contributions in cryptocurrencies such as bitcoin and ether. The Department of Labor doesn't like this too much either, but ForUsAll is a much smaller fish than Fidelity.

This may be why politicians like Elizabeth Warren are so upset about Fidelity's 401K plans but didn't bat an eye at the many years of IRA bitcoin investing—assuming that they knew this was occurring. IRAs are set up independently of employment. They are not the default with many jobs like 401ks are. So when a major 401k administrator allows people the choice to set aside part of their retirement savings in bitcoin, a lot more people will be exposed to that option.

If you don't like bitcoin, that is bad news. You want as few people to use this independent currency as possible. Even giving people the option to consider putting a modest amount of bitcoin as part of the most popular retirement vehicle in America is basically a nightmare scenario. No wonder there are so many "concerns."

Many puzzle over why Elizabeth Warren in particular is so gung-ho against bitcoin. She has a reputation for fighting the big banks and standing up for the little guy. You might think she would champion a disintermediating technology that allows the little guy an alternative to established finance—at the very least, you wouldn't expect such a person to emerge as a key anti-bitcoin player, putting forth antagonistic legislation and taking every opportunity to agitate against peer-to-peer money.

You might expect someone who doesn't like financial concentration to welcome more diversity in 401k investments. Since the 2008 financial crash, the common wisdom has been to prefer a passive investment strategy for retirement accounts. Rather than actively picking and choosing different investments, which not only incurs fees, but also adds complexity and therefore more opportunities for loss, many have favored index funds and exchange-traded funds for their 401ks.

Such funds are dominated by a few big firms—BlackRock, Vanguard, and State Street—which constitutes its own kind of macroeconomic risk. (Incidentally, many of these large investment powerhouses are promoting a so-called "environmental, social, and governance" movement that falsely portrays certain cryptocurrencies as "bad for the environment" and therefore unworthy of capital.) Allowing bitcoin as an option for 401k investing may not only be the best option for an individual investor, it also brings more diversification to an otherwise concentrated industry.

Whatever the reason for the anti-big-bank Sen. Elizabeth Warren's perplexing crusade against cryptocurrency, the policies she promotes would lead to less competition and opportunity in finance.

In the grand scheme of things, saving a little bit of money on taxes on a bitcoin investment—while certainly nice—is small potatoes. The future of cryptocurrency does not hinge on whether or not it is included in a tax-advantaged retirement account, particularly one that is always vulnerable to government penalties or even predation. Nevertheless, the knee jerk opposition of government agents to more people accessing bitcoin as a savings vehicle is revealing, particularly at a time when the stock market looks to be teetering at best.

It's a good thing that there isn't much that the Department of Labor or these Senators can do right now beyond writing angry letters. But the outsized government outrage at any marginal expansion of the bitcoin economy shows that our economic sovereignty is not going to be won without many fights.