U.S. Senators Pressure SEC Chairman Gensler Not to Approve Additional Digital Asset ETFs

Two U.S. senators have petitioned Securities and Exchange Commission (SEC) Chairman Gary Gensler not to approve additional digital asset exchange-traded funds (ETFs), citing “enormous risks” to individual investors.

on March 11th letterDemocratic senators Jack Reed (D-RI) and Laphonza Butler (D-CA) argued that allowing additional authorization for digital asset ETFs would expose investors to “low-volume” markets rife with fraud and manipulation.

“The SEC’s approval gives Wall Street the green light to sell highly volatile cryptocurrency investments to ordinary Americans through brokerage and retirement accounts,” it reads.

“Given the significant and unique risks posed by cryptocurrencies, it is important that Americans have accurate and comprehensive information about BTC ETPs. Retail investors will face enormous risk with ETPs referring to cryptocurrencies with low trading volumes or cryptocurrencies whose prices are particularly susceptible to pump-and-dumps. or any other fraudulent activity.”

Misleading terminology was a particular concern for the Democratic duo, who said the names and marketing of many already approved BTC ETPs appeared to obscure important characteristics about the investments.

Reed and Butler noted that in SEC filings for the new product, sponsors commonly refer to BTC ETPs as “exchange-traded funds (ETFs).” The senators said this is problematic because BTC ETPs differ in important ways from mutual funds and ETFs.

ETFs are a specific type of exchange-traded product (ETP). All ETFs are ETPs, but not all ETPs are ETFs. ETPs are a broader category that includes a variety of products that represent investment funds traded on exchanges, such as exchange-traded securities, exchange-traded products, and ETFs.

Not all ETPs receive the same protections as ETFs under the Investment Company Act of 1940, including fiduciary duties, leverage limits, custody requirements, governance requirements and scrutiny by the SEC.

Reed and Butler argued that the use of the term “fund” implied full protection from investment company law, which did not apply in practice. Rather, the spot BTC ETF in question has “several fundamental investor protections” that apply to all securities registered with the SEC.

“These alarming flaws raise serious concerns that brokers and advisors may now be providing retail investors with incomplete or deceptive information about BTC ETPs,” the senator added.

To support this claim, the letter pointed to the results of a January review by the Financial Industry Regulatory Authority (FINRA). The report identified “substantial violations” of FINRA Rule 2210 (Communications with the Public) in 70% of digital asset communications by brokers. Reviewed.

The senators’ main concern relates to the recently approved spot BTC ETF, which stands in contrast to the BTC futures ETF that has been on the market for some time.

BTC futures ETFs track the price of BTC, but these types of funds do not actually hold BTC. They either hold BTC futures contracts (legal contracts to buy or sell a specific asset at a predetermined price at a specific time in the future) or they hold investments in companies involved in BTC-related activities, such as mining or trading.

In contrast, a spot BTC ETF holds actual BTC, and the performance of the ETF closely follows the BTC price. This product not only provides a way for investors to gain exposure to BTC without having to purchase and store BTC directly, but also facilitates trading by allowing investors to buy and sell shares of the ETF on traditional stock exchanges.

The SEC was initially reluctant to approve these new products, citing concerns about market manipulation, price volatility, custodian issues, and investor protection similar to those raised by Reed and Butler.

In December 2023, SEC Chairman Gensler said:

“There are too many scams and bad actors in the cryptocurrency space. They often fail to comply with securities laws, as well as other laws that protect the public from money laundering and bad actors. So I would like to note that the field still does not have basic information for many projects. And intermediaries on so-called cryptocurrency exchanges are mixing it up and doing things that are not permitted anywhere else in our financial system.”

However, a few weeks after making these comments, Gensler could no longer stem the tide and reluctantly gave his approval for the first spot BTC ETF. The first 11 spot BTC ETFs were approved by the SEC on January 10th and launched the following day.

The need for pre-approval of new products was reflected in the market reaction to the first 11 ETFs. Total net inflows since its launch on January 11 are estimated at $7.5 billion, with the launch described as “one of the most successful in terms of volume and flow.”

Seeing the success of the spot BTC ETF has made other digital assets want to do the same. There are currently eight proposed spot Ether ETF applications awaiting SEC approval, and there have been hopes that other altcoins could also find themselves in the ETF sun.

In a letter to the SEC, Senators Reed and Butler strongly urged the agency not to allow the recent approval of the spot BTC ETF to set a precedent for further approvals. They said the BTC market showed “serious weaknesses” but was more established and scrutinized than other smaller cryptocurrency markets.

“Even though BTC is vulnerable to fraud and manipulation, other cryptocurrency markets are much more exposed to misconduct,” reads the letter.

But the senators’ concerns may not be warranted. The SEC refused to make the rule changes needed to sell a physical BTC ETF, but one of the reasons it eventually backed off was that it could not adequately justify its rejection based on its views on BTC compared to other digital assets.

The SEC has consistently argued for some time that BTC may be the only digital asset/token that fails to qualify as a security under the Howey test. This means regulators will have more influence over whether to allow assets they consider securities, such as Ether and altcoins, to hit the mainstream market through spot ETFs.

In relation to the currently listed products, Reed and Butler also said they would take “several concrete steps” to strengthen consumer protections, including requiring BTC ETF brokers and advisors to subject their communications and conduct to additional regulatory scrutiny. urged the SEC. In the best interests of our customers.

They also advised the SEC to ensure that spot BTC ETFs “avoid using inappropriate and confusing naming conventions in their SEC filings and other investment documents.”

Both Butler and Reed have been vocal critics of the digital asset space in the past and have supported legislative efforts to govern the space.

In December 2023, Butler joined as a co-sponsor of Senator Elizabeth Warren’s (D-MA) Digital Asset Anti-Money Laundering Act, and in July, Reid sponsored the bipartisan bill.
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