Summary
- The Crypto Council for Innovation (CCI) advocates for non-ETF products to enjoy regulatory benefits akin to those for ETFs.
- Andreessen Horowitz (A16z) suggests that the SEC evaluate products based on their specific assets and risks.
- Debate exists among commenters regarding event contracts, confidential filings, staking, and protections for retail investors.
A diverse coalition of crypto companies, asset managers, market makers, and consumer advocacy groups has approached the Securities and Exchange Commission (SEC) with varying proposals aimed at regulating a new wave of exchange-traded products (ETPs). These products include those related to cryptocurrencies, private assets, event contracts, and leveraged strategies.
In a recent letter, the Crypto Council for Innovation stated, "As the Commission has updated rules to enhance efficiencies for ETFs, it should also consider extending similar efficiencies to non-ETF ETPs. This would promote parity in regulation, stimulate innovation, and broaden choices for investors."
Myriad: Will Congress pass the Clarity Act? Click to make your prediction.The CCI's letter was among those submitted by various organizations, including Andreessen Horowitz, the Solana Policy Institute, Grayscale, Chainalysis, Charles Schwab, Jane Street, Franklin Templeton, Kalshi, and others responding to the SEC’s call for comments on "novel ETFs".
In June, the SEC issued a request for feedback on whether current regulations sufficiently protect investors and if the registration process needs adjustments for new product types. The deadline for comments was Monday.
The CCI urged the SEC to apply some of the regulatory efficiencies that ETFs registered under the Investment Company Act of 1940 enjoy to other ETPs. Currently, many spot crypto products utilize commodity-trust structures rather than registering as investment companies.
Moreover, the group advised the SEC against revising the definition of an investment company, contending that such a change could lead to ambiguity without offering clear advantages to investors.
ETPs and ETFs are financial instruments that are traded on exchanges and are designed to track an underlying asset or investment strategy. The SEC approved the first U.S. Bitcoin futures ETF to commence trading in October 2021 and subsequently authorized the first spot Bitcoin ETFs in January 2024, which directly hold Bitcoin instead of futures contracts.
A16z also requested that the SEC preserve the current legal definition of an investment company and avoid automatically categorizing products that hold non-securities as subject to the 1940 Act.
The firm emphasized that the SEC should not categorize all novel ETFs under a single classification, as these products involve distinct market structures, valuations, liquidity, and investor protection aspects. In their submission, A16z pointed out that crypto ETPs already adhere to exchange listing standards and established disclosure obligations, distinguishing them from products that involve illiquid private assets or less established strategies.
A16z further advocated for improved coordination between fund registration and exchange listing processes, which currently operate on different timelines and procedures. They proposed standardized timelines and expedited review processes for specific products.
However, the commentary from other stakeholders reflected significant divisions on the topic of ETFs.
Grayscale expressed opposition to imposing new portfolio restrictions on established digital asset products and supported the idea of optional confidential consultations prior to public filings. Meanwhile, Charles Schwab opposed a completely confidential process and suggested that any resulting filing should be made public at least 75 days before it becomes effective.
Chainalysis, a blockchain analytics firm, argued that public blockchains can facilitate real-time monitoring, verifiable portfolio data, and machine-readable disclosures.
They recommended that instead of imposing generic listing standards on blockchain-based novel ETFs, the SEC clarify through interpretive guidance that exchanges listing such products must implement monitoring systems that meet defined criteria. "Exchanges should document their analysis, coverage, and identified gaps through regular reporting," Chainalysis wrote.
Kalshi, a prediction market, contended that event contracts should remain eligible for registered funds, which must adhere to governance and investor protection standards.
They stated, "When investors seek pooled access to these event contracts, we believe the registered fund is the suitable vehicle." Event contracts yield a fixed payout—or none—based on a predetermined outcome. Kalshi acknowledged that some event contracts might have less market depth compared to traditional futures, but argued that these differences do not justify an outright ban. They asserted that existing fund regulations, tailored disclosures, and collaboration with the Commodity Futures Trading Commission could mitigate risks related to valuation, liquidity, leverage, and market oversight.
Myriad: Where does XRP price go next? Click to make your prediction.Conversely, the consumer advocacy organization Public Citizen opposed this approach, cautioning that event-contract ETFs could introduce gambling-like products into a format that retail investors associate with stable long-term investments.
They remarked, "Retail investors depend on ETFs as a reliable and familiar investment vehicle, expecting them to be linked to productive economic activities. Investors utilizing ETFs to construct long-term portfolios may not realize that these products do not compound, do not track an underlying enterprise, and do not behave like diversified index funds they are accustomed to."
The SEC now faces the task of deciding whether these products necessitate a unified regulatory framework or distinct rules tailored to their specific structures and risks.