- Two United States Senators have written to the SEC Chair Gary Gensler asking that his agency stop approving subsequent cryptocurrency ETFs
- In the letter, the senators outlined that the ETFs are riddled with risks to investors and must be properly scrutinized
- Bitcoin ETPs must come under the full protections of the Investment Company Act of 1940 to use the terms Fund or ETF
- An Ethereum ETF approval in question as this letter to Gensler might be a stumbling block. Analysts think it could also be a spillover of inside conversations within the SEC regarding the pending Ethereum ETFs.
Two US Democrat Senators have written a letter to SEC Chair Garry Gensler asking that the Commission should disapprove more cryptocurrency ETPs (Exchange Traded Products). In the two-page letter, Senators Jack Reed and Laphonza Butler dived into the need for more transparency from ETP brokers and the enormous risks posed by cryptocurrency ETPs, urging the SEC to not approve any more crypto ETPs citing that their markets are far more exposed to misconduct than Bitcoin’s.
Brokers and Advisers Are Not Transparent With The Nature of Bitcoin ETPs, Says Letter
The letter started by urging the SEC to set systems in place for the protection of investors after the recent approval of spot bitcoin ETPs. The Senators believe the SEC needs to up its investor protection game because Wall Street may leverage the approval of the spot bitcoin products to infiltrate the market with “volatile cryptocurrency investments” and sell them to “ordinary Americans through their brokerage and retirement accounts.”
It further highlighted the need for American investors to receive “accurate comprehensive information about bitcoin ETPs” citing FINRA’s review of over 500 crypto-asset-related retail communications. After its review, FINRA (Financial Industry Regulatory Authority) found that 70 percent of the materials reviewed violated its Rule 2210 which requires fair and balanced communications from brokers and dealers to the public.
“FINRA Rule 2210 prohibits claims that are false, exaggerated, promissory, unwarranted, or misleading. The rule also prohibits the omission of any material fact if the omission, in light of the context of the material presented, would cause a communication to be misleading,” says FINRA.
The Senators also faulted the naming and marketing of the Bitcoin ETPs as Bitcoin “Exchange-Traded Funds or ETFs” claiming the slight difference in terminology could conceal their vital characteristics.
“Although it might seem like a small distinction,” said the letter, “this purposeful confusion of terminology is troubling because bitcoin ETPs are different in critical ways from mutual funds and ETFs.”
Bitcoin ETPs Must Come Under The 1940 Investment Company Act to be Called ETFs
The letter also implied that a proper “Fund” or “ETF” should be subject to the substantive and structural protections of the 1940 Investment Company Act, which restricts harmful practices that apply to mutual funds, ETFs, and most other investment funds sold to retail investors. However, bitcoin ETPs have yet to come under the “full protections” of the Investment Company Act which makes using the term “ETF” a transparency violation.
Consequently, Senators Reed and Butler made three major requests to the SEC to address the investor safety challenges in the crypto ETP industry. Firstly, it asked the SEC to “carefully scrutinize brokers’ and advisers’ ” communication about Bitcoin ETPs so users can have complete and accurate information. Secondly, the SEC should assess brokers and advisers that recommend crypto ETFs to ensure that they are in clients’ best interest according to SEC rules. Thirdly, the SEC must “ensure that bitcoin ETPs do not use inappropriate and confusing naming conventions in SEC filings and other investor documents.”
The letter caps off by reiterating that retail investors would be endangered by “ETPs referencing thinly traded cryptocurrencies” or assets with high pump-and-dump or fraudulent tendencies.
“The Commission is under no obligation to approve such products, and given the risk, it should not do so,” said the letter.
Spot Ethereum ETF Chances In Question Following This Letter
The letter to Gary Gensler has begun to raise fresh doubts about the Spot Ethereum ETFs which are expected to get their final decision on May 23rd. Eric Balchunas, Senior Bloomberg ETF Analyst said “this is part of why we are pessimistic re spot ETH ETF approval chances.”
There are also speculations that an SEC insider helped the Democratic senators to write the letter, considering the ease with which it articulated seemingly complex ETF technicals such as the correlation between futures and spot market correlation. Bloomberg’s James Seyffart is convinced “there’s almost zero chance these senators did the analysis themselves” considering the significant amount of data and time an analysis like this would require.
The technicality of the letter casts doubt on a spot ETH ETF approval as this letter is suspected to be culled from an SEC study that is being prepared to justify a rejection. These are still just speculations and the final verdict on spot Ethereum ETFs will be given by May.