Crypto groups push SEC for tailored rules on new wave of ETFs

Cryptocurrency companies, asset managers, market makers and consumer advocates have pressed the US Securities and Exchange Commission (SEC) with competing plans to regulate a new generation of exchange-traded products, covering crypto assets, private assets, event contracts and leveraged strategies.

"Just as the Commission modernised the rules to promote efficiencies for ETFs, the Commission should consider granting similar efficiencies to ETPs that are not ETFs to promote regulatory parity, foster innovation and expand investor choice," wrote the Crypto Council for Innovation.

The CCI's letter joined proposals from Andreessen Horowitz, the Solana Policy Institute, Grayscale, Chainalysis, Charles Schwab, Jane Street, Franklin Templeton, Kalshi and others, in response to the SEC's request for comment on "novel ETFs".

The SEC issued the request in June, asking whether existing rules adequately protect investors and whether registration procedures should change to accommodate new products. Letters were received on Monday, the final day for submissions.

The CCI asked the agency to extend some of the regulatory efficiencies available to ETFs registered under the Investment Company Act of 1940 to other exchange-traded products. Many spot crypto products use commodity index fund structures instead of registering as investment companies.

The group also said the SEC should "refrain from updating the definition of investment company", arguing that a change could create uncertainty without providing a clear benefit to investors.

Exchange-traded products (ETPs) and exchange-traded funds (ETFs) are investments traded on exchanges that track an underlying asset or strategy. The SEC allowed the first US Bitcoin futures ETF to begin trading in October 2021, and then approved the country's first spot Bitcoin ETFs — which hold Bitcoin rather than futures contracts — in January 2024.

a16z also asked the SEC to maintain the statutory definition of an investment company and not automatically bring products holding non-securities under the 1940 Act.

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

a16z said crypto ETPs already operate under established exchange listing standards and disclosure requirements. This infrastructure, it argued, sets them apart from products holding illiquid private assets or pursuing less-tested strategies.

The firm also called for closer coordination between fund registration and exchange listing reviews, which currently follow different procedures and timelines. It proposed standardised timelines and shorter review periods for certain products.

Other proposals, however, showed a wider split in the debate over ETFs.

Grayscale opposed new portfolio restrictions for established digital asset products and supported optional confidential consultations ahead of public filings. Charles Schwab opposed a fully confidential process and proposed making a resulting filing public for at least 75 days before it takes effect.

Chainalysis, the blockchain forensics firm, said public blockchains could support real-time surveillance, independently verifiable portfolio data and machine-readable disclosures.

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

Kalshi, the prediction market, argued that event contracts should remain eligible for registered funds, which are subject to governance and investor protection requirements.

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

Event contracts pay a fixed amount — or nothing — based on a specified outcome. Kalshi acknowledged that some may have less market depth than conventional futures, but said these differences "do not justify categorical exclusion". It argued that existing fund rules, tailored disclosures and coordination with the Commodity Futures Trading Commission (CFTC) could address risks involving valuation, liquidity, leverage and market surveillance.

However, the consumer advocacy group Public Citizen opposed this approach, warning that event-contract ETFs would place betting-like products inside a vehicle that retail investors associate with long-term investment.

"Retail investors rely on ETFs as a familiar, trusted 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 company, and do not behave like the diversified index funds they are accustomed to."

The SEC must now determine whether these products require a common regulatory framework or separate rules based on their structures and risks.

* Translated and edited with permission from Decrypt.

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