If the existing precedent is changed, spot crypto ETFs that focus on assets other than bitcoin and ether will be able to quickly launch.
In other words, the Securities and Exchange Commission would need to see a regulated futures market — and a correlation between that and the spot market — before approving ETFs that hold crypto directly.
In January, the regulator gave its approval to spot Bitcoin ETFs. It then last week approved 19b-4 proposals from the exchanges on which spot ether ETFs would launch — one step toward their trading in the future.
The SEC’s precedent does not support this hope any time soon, even though the recent action prompted optimism about potential future products focusing on solana or XRP, and perhaps dogecoin.
“I can’t see SEC approval without a functioning regulated market,” Bryan Armour is a Morningstar director for passive strategy research. “Personally, I don’t think the futures market gives more insight into the underlying spot markets and potential manipulation, but that’s the line drawn in the sand by the SEC.”
Futures for spot progress
CME Group introduced bitcoin futures to its product line in December 2017.
Gary Gensler SEC Chairman said in an August 2021 virtual event that the SEC will be back. “look forward” Reviewing filings that are limited to CME bitcoin futures contracts. ProShares released the first Bitcoin futures ETF a little over two months after that.
The launch of futures funds did not prove to be an instant path for launching US bitcoin spot ETFs. The futures funds helped the cause tremendously.
Grayscale Investments, which sued the SEC for approving bitcoin futures products but blocking spot BTC, in 2022 claimed that the decision of the regulator to allow Bitcoin Futures Funds, while blocking Spot BTC Products, was unjust. “arbitrary and capricious.”
Grayscale has won the case, as judges have noted. “The commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decision-making.”
The SEC then cleared the US’s first spot Bitcoin ETFs, which were issued in January.
It’s not much different on the ETH end.
CME Group began offering ether futures in February 2021. Despite a couple of unsuccessful attempts to launch ether funds, SEC gave the green light for ETH Futures Funds last October.
Next, regulators approved 19b-4 listings for spot ether on Cboe NYSE Arca & Nasdaq.
Noticed: The SEC Order of May 23 “the CME ether futures market has been consistently highly correlated with this subset of the spot ether market throughout the past 2.5 years.”
The correlation between the markets throughout the sample period was no less than 96.2% using data at an hourly interval — essentially confirming a past analysis submitted by ether ETF applicant Bitwise.
Can the precedent be changed?
Armour Bitwise Senior Crypto Analyst Ryan Rasmussen, and other experts have pointed out that this precedent may change.
“So far regulated futures markets have been a prerequisite for spot ETF approvals for both bitcoin and ethereum,” Rasmussen told Blockworks. “However, it’s not guaranteed that it will be a prerequisite for approving every crypto spot ETF in the future.”
CME Group currently does not offer any crypto futures other than BTC and ETH.
Donald Trump’s former campaign manager has indicated that he would support the crypto-industry if elected. He has not, however, provided concrete details. Recently, more Democratic lawmakers are showing their support. Dozens of them have departed from the majority of their party in order to pass pro-crypto legislation.
“Things could change in Congress pretty quickly, particularly if they come out with a market structure bill over the next year and really define what’s a commodity and what’s a security,” James Seyffart, of Bloomberg Intelligence, spoke to Blockworks’ co-founder Michael Ippolito.
Eric Balchunas of Bloomberg Intelligence noted in the same podcast, that Joe Biden’s reelection could mean it will be some time before spot crypto ETFs are cleared by SEC.
The commission could substantially change its attitude toward crypto if Trump wins, he said — adding, however, that it remains “a huge variable” What would Trump do if he embraces cryptocurrency?
Crypto products to be released in the future
The unanswered issue of whether ether was a currency or security was viewed as a hurdle to ETH Fund approval.
Many industry observers noted that the SEC’s recent ether ETF Order essentially clarified ether as not being a security.
It seemed at least to indicate that the agency did not consider ETH not staked as a form of security, given the fact the products planned would not stake their ether.
Gensler said that most cryptoassets are securities. This would make the possibility of them being packaged into an ETF questionable.
Ruslan LIenkha, head of markets at YouHodler said that he expected to see the next filings be for ETFs based on XRP or solana.
SOL has been labeled a security by the SEC in its lawsuits brought against Coinbase last year. It also labelled cardano(ADA), Polygon (MATIC), Filecoin (FIL), and NEAR Protocol NEAR as securities.
Litecoin, dogecoin, and bitcoin (BTC) are the two top cryptoassets the SEC is yet to officially classify as securities.
Last year, a US federal court ruled that programmatic purchases of XRP by Ripple did not constitute unregistered securities offerings.
Rasmussen noted that many financial advisors are working on getting up to speed with bitcoin. The second and third steps in the crypto journeys for financial professionals include learning about ETH (Ethereum), SOL (Solidity) and other crypto-assets.
He explained that as more crypto assets are packaged in ETFs, they will likely play an important role in investing in cryptocurrency.
Rasmussen stated that it is difficult to estimate a timeline for these launches.
Then he added: “Crypto index funds could see significant demand from advisers because they’d enable them to provide clients with broad exposure to the fast-growing crypto sector while removing the difficulty of picking and choosing winners.”
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