Two US Senators unhappy with how spot bitcoin ETFs have been marketed are imploring the Securities and Exchange Commission to halt any future crypto fund approvals.
In a letter dated March 11 to Securities and Exchange Commission Gary Gensler, Sens. Jack Reed (D-R.I.) and Laphonza Butler (D-Calif.) implored the SEC to crackdown on “alarming deficiencies” they say exist in communications to investors within the asset class.
They also asked the US regulator to refrain from approving more exchange-traded products linked to other crypto assets.
Ten US spot bitcoin ETFs launched on Jan. 11 after years of fund issuer attempts to bring such funds to market.
“The SEC’s approvals have provided a green light for Wall Street to sell volatile cryptocurrency investments to ordinary Americans through their brokerage and retirement accounts,” Reed and Butler wrote in the letter. “Given the significant and unique risks posed by cryptocurrency, is it critical that Americans receive accurate, comprehensive information about bitcoin ETPs.”
The senators allude to a January report by the Financial Industry Regulatory Authority (FINRA), which found that 70% of the 500 analyzed crypto-related communications to retail investors from FINRA member firms had “potential substantive violations.”
The possible violations relate to FINRA Rule 2210, which “prohibits claims that are false, exaggerated, promissory, unwarranted or misleading.”
Some companies failed to differentiate between crypto assets offered through the firm and those provided through a third party, the agency’s analysis concluded. Other communications implied that crypto assets functioned like cash.
The FINRA review of crypto-related communications did not focus on ETFs specifically.
Read more: 70% of crypto communications potentially misleading, FINRA analysis finds
The fate of potential future crypto ETPs?
In addition to urging the SEC to “scrutinize” such communications to investors about these products, Reed and Butler said the SEC should “strictly limit the precedential application of these approvals.”
“While the bitcoin market has displayed serious weaknesses, it is nonetheless far more established and scrutinized than the market for any other cryptocurrency,” the senators added. “However vulnerable bitcoin may be to fraud and manipulation, markets for other cryptocurrencies are far more exposed to misconduct.”
The SEC is considering a number of applications for ETFs that would hold ether directly.
Ether is the second-largest crypto asset with a market capitalization of roughly $440 billion, as of Friday morning. That was about one-third of bitcoin’s market cap, which was slightly above $1.3 trillion at the time.
Grayscale Investments notched a court victory against the SEC last August in a decision that ultimately helped lead to the approval of US spot bitcoin ETFs.
The crypto asset manager had called the SEC’s approval of bitcoin futures ETFs — but not funds that hold BTC directly — a decision that was “arbitrary and capricious.”
Judges wrote in their decision that the SEC’s “unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decision-making.”
Reed and Butler said they don’t believe the futures markets for other crypto assets will show a tight correlation to spot markets that would allow for meaningful market surveillance and deter bad actors.
They added: “The commission is under no obligation to approve such products, and given the risk, it should not do so.”
Still, the SEC allowed for ETFs that invest in ether futures contracts to start trading in October.
In a letter supporting an application by Grayscale to convert its Ethereum Trust to an ETF, Coinbase pointed to ETH’s tightness of spreads and price correlation across spot markets.
“The ETH market and [NYSE Arca’s] surveillance-sharing agreement with CME support the position that the exchange’s proposed rule change should be approved for virtually identical reasons articulated by the commission with respect to spot bitcoin [ETPs],” Coinbase wrote.The SEC has delayed its ruling on several proposed ether ETFs, including BlackRock’s application earlier this month. Segment observers expect the agency to decide on such offerings in May.
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Source: https://blockworks.co/news/sec-approval-ether-etfs-us-senators