Last month, the Fairfax County Retirement System announced that it would invest $70 million of its $6.8 billion fund in two crypto yield farm funds. In other words, the pension money that allows teachers, firefighters and police officers to retire will be invested in volatile digital tokens known as yield farming projects.
Yield farming projects offer significantly higher returns than those available in the bond markets – high risk, high return, that’s the idea. But there are few investor protections found in traditional finance. Earned protocols and coins are subject to extreme volatility, and even so-called all-in pulls when developers abandon a project and walk away with investor funds. There is no Federal Deposit Insurance Corporation protecting these funds.
In October 2021, one of the largest pension funds in Quebec – Caisse de Dépôt et Placement du Québec – invested $150 million in the crypto-lending company called Celsius Network. When Celsius went bankrupt over the summer, the pension fund suffered a sharp drop in value and was forced to cancel its investment. Interestingly, the fund’s investment manager refused to admit the investment was a mistake, simply calling it “too early”.
Unfortunately, this is unlikely to be the only time a pension fund loses money on a risky crypto bet. But we have tools at our disposal to mitigate the damage.
The government has some levers it can pull to penalize luring investments in pension funds with the promise of crazy returns, just to feed the retirement savings of those who need it most. Most states have a version of the False Claims Act that mirrors federal law, which allows an insider with information about the misuse of public funds to provide that information to the government for a financial reward. Many state versions cover any company that lies in order to get public pension money – in other words, stealing pensions is stealing the state.
Applying this to the crypto sphere, any crypto company that misrepresents income, assets, asset backing, insurance, real stablecoin stability, or any of the many other things that too many crypto companies were caught lying, could be liable under the False Claims Act of an applicable state. If a whistleblower knew, for example, that a crypto company’s reported statements were based only on wishful thinking, that whistleblower could file a lawsuit on behalf of the state. If found liable, this crypto company would be liable for up to triple damages (i.e. three times the amount it costs the state) plus penalties.
If a pension fund decided to bet on crypto and that crypto company disappeared tomorrow, the fund would drop to zero and the fund would have nothing left to pay that firefighter’s benefits. The funds aren’t going to do that of course, but even if they were to dedicate 10% of their assets to crypto which then disappeared, that 10% drop would be significant for people who depend on that money to retire.
Some would argue that pension funds could lose the “high yield” part of these yield farming operations if they don’t take these risky bets. But I will answer with this: there is not yet a crypto business that has proven to be a safe investment. Even the so-called “safe” companies in the space – for example, Coinbase as a publicly traded company – have wildly fluctuating prices and are much riskier investments than what you would normally see in retirement accounts. Actual crypto companies are even more risky and have outsized losses (and occasional gains). Moreover, the possibility of the anonymous people behind these schemes running off with the money – making it difficult for the government to recover, even in the case of a False Claims Act case – should make people think. pension fund twice before investing in a yield farming project.
Unfortunately, this is not the first time that pension funds have become too interested in risky investments. A past generation of pension funds chased big, risky bets in the residential mortgage market. After the mortgage crisis, these big bets led to a series of False Claims Act settlements with banks that had lied to funds about the security of their investments. Hopefully this current round of crypto-curious investment managers doesn’t end with the same level of devastating loss. But if so, the False Claims Act will be there to help the government recover those funds.
In Florida, Governor Ron DeSantis has said he wants to prevent pension funds from doing due diligence on a company’s environmental, social and governance (ESG) milestones; for example, review a company’s efforts to diversify from fossil fuels or promote worker equity before investing. But from a pragmatic perspective, these crypto projects have proven to be a far greater risk to pension funds than a company implementing environmental or worker-friendly practices. Given the crypto industry’s willingness to admit that this is a big Ponzi scheme with no underlying asset value, it’s hard to justify a pension fund investment. In this one.
