Crypto Industry Urges SEC to Create Customized Framework for Emerging Exchange-Traded Products

In brief

• The Crypto Council for Innovation is calling for non-ETF products to benefit from the same regulatory efficiencies currently available to ETFs.
• Andreessen Horowitz recommended that the SEC evaluate each product individually based on its underlying assets and associated risks.
• Comment letters revealed disagreement on issues including event contracts, confidential filing processes, staking, and protections for retail investors.

A diverse coalition of cryptocurrency firms, asset managers, market makers, and consumer protection advocates has submitted a wide range of recommendations to the Securities and Exchange Commission regarding the regulation of next-generation exchange-traded products, including those focused on digital assets, private market investments, event contracts, and leveraged trading strategies.

“Just as the Commission has modernized rules to promote efficiencies for ETFs, the Commission should consider providing similar efficiencies for non-ETF ETPs to promote regulatory parity, foster innovation, and expand investor choice,” the Crypto Council for Innovation stated in its filing.

The Crypto Council for Innovation’s submission was part of a larger collection of comment letters filed by organizations including Andreessen Horowitz, the Solana Policy Institute, Grayscale, Chainalysis, Charles Schwab, Jane Street, Franklin Templeton, and Kalshi, all responding to the SEC’s recent solicitation for public input on “novel ETFs.”

The SEC first issued its request for comments in June, asking stakeholders whether existing regulatory rules sufficiently safeguard investors and whether registration procedures should be revised to accommodate emerging financial products. All comment letters were due on Monday, marking the final day of the submission window.

The Crypto Council for Innovation urged the SEC to apply certain regulatory efficiencies currently afforded to ETFs registered under the Investment Company Act of 1940 to other types of exchange-traded products. Many spot cryptocurrency products are structured as commodity trusts rather than registering as investment companies.

The organization also recommended that the SEC avoid altering the definition of “investment company,” arguing that any such change would generate regulatory uncertainty without delivering meaningful advantages.

Both exchange-traded products and exchange-traded funds are investment vehicles that trade on exchanges and track the performance of an underlying asset or strategy. The SEC approved the first U.S. Bitcoin futures ETF for trading in October 2021, followed by the approval of the country’s first spot Bitcoin ETFs, which hold actual Bitcoin rather than futures contracts, in January 2024.

Andreessen Horowitz similarly recommended that the SEC preserve the existing statutory definition of an investment company and refrain from automatically subjecting products holding non-securities to the requirements of the 1940 Act.

“The Commission should avoid treating all Novel ETFs as a single category because these products raise different market structure, valuation, liquidity, and investor protection considerations,” the firm wrote.

Andreessen Horowitz argued that cryptocurrency ETPs already operate under established exchange listing standards and disclosure requirements, a regulatory framework that distinguishes them from products holding illiquid private assets or pursuing experimental strategies.

The firm also advocated for greater coordination between fund registration reviews and exchange listing reviews, which currently operate on separate procedures and timelines. It suggested implementing standardized schedules and reduced review periods for specific product categories.

Other comment letters, however, revealed a broader range of perspectives on the future regulation of ETFs.

Grayscale pushed back against new portfolio restrictions for established digital asset products and endorsed the idea of optional confidential consultations prior to public filings. In contrast, Charles Schwab opposed a fully confidential process and proposed that any resulting filing be made public for a minimum of 75 days before becoming effective.

Blockchain analytics firm Chainalysis suggested that public blockchains could enable real-time surveillance, verifiable portfolio data, and machine-readable disclosures.

“We recommend that, rather than restricting generic listing standards for blockchain-based Novel ETFs, the Commission clarifies through IM guidance that exchanges listing such products deploy monitoring systems meeting defined standards,” Chainalysis wrote. “Exchanges should document their analytical deployment, coverage scope, and identified gaps through periodic reporting.”

Prediction market platform Kalshi maintained that event contracts should continue to be eligible for inclusion in registered funds, which are subject to governance requirements and investor protections.

“When investors seek pooled exposure to these event contracts, we believe the registered fund is an appropriate vehicle,” Kalshi wrote.

Event contracts pay either a fixed amount or nothing at all depending on whether a specified outcome occurs. Kalshi acknowledged that some event contracts may have less market depth than traditional futures but argued that these differences “do not warrant categorical exclusion.” The company suggested that existing fund regulations, tailored disclosure requirements, and coordination with the Commodity Futures Trading Commission could adequately address risks related to valuation, liquidity, leverage, and market oversight.

Consumer advocacy organization Public Citizen took the opposite stance, cautioning that event contract ETFs would effectively embed gambling-style products within an investment vehicle that retail investors typically associate with long-term wealth building.

“Retail investors rely on ETFs as a familiar and trustworthy format, expecting them to represent investments tied to productive economic activity,” the group wrote. “Investors who use ETFs to build long-term portfolios may not understand that these products do not compound, do not track an underlying enterprise, and do not behave like the diversified index funds they are accustomed to.”

The SEC now faces the task of determining whether these emerging products should be governed by a unified regulatory framework or by separate rules tailored to their individual structures and risk profiles.

Source link