Reason Foundation Outlines Prudent Framework for Public Pensions Eyeing Crypto Investments Amid Rising State Debates

By Staff Reporter | Published February 10, 2026

The Reason Foundation has released a detailed FAQ and accompanying policy study urging public pension systems to approach cryptocurrency and digital asset investments with strict fiduciary discipline, capping exposure at 2% to 10% of assets under management while emphasizing risk controls and transparency.[1][2]

The guidance, titled “Frequently Asked Questions on Public Pension Investment in Cryptocurrency and Digital Assets,” accompanies a broader report, “U.S. Public Pension and Trust Fund Investment in Digital Assets.” It positions digital assets like Bitcoin as potential high-risk diversifiers akin to gold, offering inflation hedging but demanding rigorous guardrails to safeguard taxpayer-funded pensions.[1][2]

A Balanced View on High-Risk Assets

Reason Foundation’s Pension Integrity Project treats cryptocurrencies similarly to private equity—both high-risk alternatives warranting scrutiny. The FAQ stresses that investments must prioritize fiduciary duty to maximize risk-adjusted returns, not chase novelty or speculative gains. It recommends sourcing crypto allocations from existing alternative buckets to avoid inflating overall portfolio risk.[1]

Bitcoin and Ethereum are highlighted as viable under controlled conditions, while most altcoins are dismissed due to governance risks, regulatory uncertainty, and low recovery potential in failures. Stablecoins, if fully backed and regulated, could serve as cash equivalents.[2]

Contrasting Perspectives Emerge

Not all voices align with Reason’s measured stance. A report from Better Markets calls for outright bans on crypto in public pensions, citing extreme volatility, fraud risks, and fiduciary breaches. It notes over 20 states in 2024-2025 introduced bills allowing 5-10% caps on digital assets, warning that such moves endanger retirees.[3]

Pension funds generally remain cautious, viewing crypto’s price swings, evolving regulations, and security vulnerabilities as deterrents. Some opt for indirect exposure via blockchain-related stocks like MicroStrategy or Coinbase, already embedded in major indices.[4][2]

Regulatory Shifts Pave Way for Consideration

In private retirement plans like 401(k)s, the landscape is evolving. The Department of Labor rescinded its 2022 anti-crypto guidance in May 2025, adopting a neutral stance under ERISA standards. New fiduciary rules on alternatives, including crypto, are expected by February 2026.[5]

A presidential executive order in August 2025 further democratized access to alternatives for 401(k) investors, including crypto funds, though experts advise limiting to 1-5% based on risk tolerance. Stablecoins gained legitimacy via the July 2025 GENIUS Act, mandating reserves and audits.[6][9]

Public examples include Fairfax County’s retirement fund, which invests up to 15% in blockchain tech but holds zero direct crypto exposure to date.[8]

Key Recommendations for Prudence

Aspect	Reason Foundation Guidance
Allocation Cap	2%-10% of AUM, from alternatives
Focus Assets	Bitcoin, Ethereum, regulated stablecoins
Risk Controls	Custody rules, rebalancing, exit strategies, transparency
Avoid	Speculative altcoins

Reason emphasizes that public pensions already tolerate non-yielding assets like gold for hedging. Crypto could mirror this if managed rules-based, distinguishing prudent allocation from speculation.[2]

Broader Implications for States and Retirees

As state legislatures debate crypto permissions, Reason’s framework aims to protect solvency without blanket prohibition. Fiduciaries must update investment policies, ensure custody, and educate stakeholders on volatility and compliance.[5][7]

Critics like Better Markets argue risks—hacks, scams, unclear laws—outweigh benefits, urging statutory bans to honor duties to vulnerable retirees.[3]

The debate underscores a tension: innovation versus stability. With crypto’s market cap surpassing traditional assets in volatility-adjusted terms, pensions face pressure to diversify amid inflation fears, yet history warns of bubbles.[1][4]

“Public pension investment in digital assets must be grounded in fiduciary duty, prudence, and risk control—not in novelty or return-chasing.”
— Reason Foundation[1]

Looking Ahead

Pending DOL guidance and state actions will shape outcomes. For now, Reason’s FAQ equips trustees with tools for informed decisions, balancing potential upsides like asymmetric returns against downsides of unchecked exposure.

Stakeholders, from trustees to taxpayers, must weigh these frameworks as digital assets mature. Prudence, not prohibition or exuberance, emerges as the fiduciary north star.