Senators raise concerns over crypto ETF approvals, face industry backlash

Two US Senators have recently expressed concerns to the Securities and Exchange Commission (SEC) regarding the approval of further crypto exchange-traded funds (ETFs). 

Senators Jack Reed and Laphonza Butler, in a communication with SEC Chair Gary Gensler, highlighted the potential risks to retail investors, specifically citing the possibilities of fraud and manipulation in markets for smaller cryptocurrencies. They emphasized the findings of a FINRA survey, revealing that 70% of brokers’ interactions with retail investors breached fair disclosure norms, with misleading comparisons of cryptocurrency to cash and inadequate explanations of risks.

The senators critiqued the terminology used for bitcoin ETFs, suggesting it conceals critical aspects of these investments. They pointed out the heightened risk to investors from ETFs that reference less frequently traded cryptocurrencies or those susceptible to market manipulations like pump-and-dump schemes. 

“Brokers’ communications falsely equated cryptocurrency with cash; in others, they provided misleading explanations of cryptocurrency’s risks,” they highlighted, stressing about the dangers of misinformation in the sector.

Additionally, Reed and Butler cautioned against allowing the recent approval of spot Bitcoin ETFs to set a precedent for future endorsements. The senators advocated for more rigorous oversight of Bitcoin ETFs and the advisory services related to them, given the less regulated nature of other cryptocurrency 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,” the senators warned.

This stance has drawn harsh criticism from industry experts. Coinbase’s Chief Legal Officer, Paul Grewal, publicly countered the senators’ concerns, arguing that established markets for major cryptocurrencies like Ether exhibit robust metrics that compare favorably with the largest traded equities. Grewal highlighted Ether’s market depth and liquidity, asserting a direct correlation in Ether’s futures and spot markets akin to that observed in Bitcoin’s markets.

The letter follows discussions between Coinbase, crypto asset manager Grayscale, and SEC officials that took place on March 6, focusing on the potential approval of spot Ether ETFs. The meeting emphasized Coinbase’s argument for parity in the SEC’s treatment of Bitcoin and Ether ETFs. 

Several analysts have speculated on the SEC’s apprehensions regarding the approval of Ether ETFs, citing concerns over market correlation disparities. Yet, the anticipation grows as the crypto industry and regulators continue their dialogue ahead of a significant decision deadline for an Ether ETF, marked for May 23.