Democrats to SEC: Just say no to spot Ethereum ETFs and any other crypto ETPs

Two Democratic U.S. senators urged Securities and Exchange Commission Chair Gary Gensler not to go any further in approving future crypto products following its approval of spot bitcoin exchange-traded funds earlier this year. 

Sens. Laphonza Butler of California and Jack Reed of Rhode Island said the SEC should limit future crypto ETF applications and that other cryptocurrencies do not "show the trading volumes or integrity to support associated ETPs." Both senators are also members of the Senate Banking Committee, which has jurisdiction over securities and financial markets. 

"Retail investors would face enormous risks from ETPs referencing thinly traded cryptocurrencies or cryptocurrencies whose prices are especially susceptible to pump-and-dump or other fraudulent schemes," they said. "The Commission is under no obligation to approve such products, and given the risk, it should not do so." 

Since the SEC approved 11 spot bitcoin ETFs in January, attention has turned to whether the agency could authorize spot Ethereum ETH -3.98% ETFs next. So far, big-name firms, including BlackRock and Fidelity, have filed applications. Optimism dampened over the past week on whether the agency would approve such a product. Bloomberg ETF analyst Eric Balchunas dropped his estimate of the chances of a spot Ethereum ETF approval by May from about 70 percent to 30 percent. 

Spot bitcoin ETF concerns 

Sens. Butler and Reed also raised concerns about communications between brokers and retail investors, citing a January report from the Financial Industry Regulatory Authority. The watchdog overseeing brokerage firms found that 70 percent of communications about crypto may have violated its rules to be fair and balanced and said some firms made false statements that crypto functioned like cash or cash equivalents, among other misrepresentations. 

"These alarming deficiencies raise significant concerns that brokers and advisers may now provide incomplete or deceptive information about bitcoin ETPs to retail investors," the senators said. 

Sens. Butler and Reed also said the name of the spot bitcoin ETFs raises issues. The products have mainly been called spot bitcoin ETFs, though the SEC has referred to them as exchange-traded products, or ETPs. 

"Although it may seem like a small distinction, this purposeful confusion of terminology is troubling because bitcoin ETPs are different in critical ways from mutual funds and ETFs," they said. 

The senators said Bitcoin ETPs, for example, are not subject to the same protections as ETFs, including custody requirements and SEC examinations. 

The SEC should scrutinize brokers' and advisers' communications regarding bitcoin ETPs, examine brokers and advisers that recommend ETPs to ensure they are acting in the best interest of their clients and make sure that bitcoin ETPs do not use confusing language in filings and investor documents, the senators said. 

An SEC spokesperson said Chair Gensler would respond to lawmakers directly. 

Bloomberg ETF analyst Balchunas said the letter further makes him pessimistic about a spot Ethereum ETF. 

"The blockbuster success of the Bitcoin ETF is upsetting to high ranking Dems. Buyer’s remorse," Balchunas posted on X on Thursday. "This is part of why we are pessimistic re spot Eth etf approval chances."

Paul Grewal, Coinbase's chief legal officer, pushed back on the senators' letter and said many cryptocurrencies "demonstrate market quality metrics that exceed even the largest traded equities." 

ETH, for example, has a deep and liquid spot market compared to stocks in the S&P 500, Grewal said in a post on X on Thursday.