A court order forced the Securities and Exchange Commission (SEC) to approve the first U.S.-listed exchange traded funds (ETFs) to track bitcoin, and now, as asset managers aim to list a second wave of more complex crypto products, they may experience pushback from the agency, Reuters reported.
In August, the U.S. Court of Appeals for the D.C. Circuit ruled that the SEC must accept an application from crypto asset manager Grayscale Investments to list an exchange-traded fund that tracks the price of bitcoin. The SEC had previously rejected the application, saying that cryptocurrency markets are exposed to fraud and manipulation. As a result of the court order, the SEC approved the application in January.
Since the appeals court's decision, 12 asset managers—including Grayscale, ProShares, VanEck, Invesco, Fidelity and Ark Investments— filed applications to launch 25 next-generation cryptocurrency ETFs. But lawyers and industry sources interviewed by Reuters expect the agency to move cautiously.
"It doesn't seem like there's a rush to approve a second wave of products," said Yesha Yadav, a professor focusing on digital asset regulation at Vanderbilt University, adding the SEC would have to "grapple with" how much risk it can stomach.
An executive at one issuer told Reuters that it was unclear whether SEC approval of the bitcoin ETFs would pave the way for other products. Reuters reported that some applications before the SEC are for products designed for day traders, such as leveraged exchange-traded bitcoin products. These would seek to pump up returns by further heightening the cryptocurrency's volatility. Other applications are for inverse products; these products allow speculators to bet on a decline in the price.
James Angel, associate professor of finance at Georgetown University, told Reuters that the SEC would likely avoid outright rejection of applications, which could invite a legal challenge. "I think they will look for every possible detail or excuse they can to delay the process," he added.
Some of the applications would track the price of ether, the No. 2 cryptocurrency after bitcoin. Because the spot ether ETFs would be a new product and require a rule change, the SEC must approve or deny them by a set deadline. VanEck's filing deadline is May 23, while Grayscale's is June 18.
The arguments that Grayscale used to defeat the SEC in its bitcoin ETF suit could apply to the ether products because the circumstances are similar, but some regulatory experts and issuers said Gensler could argue ether is a different type of asset.
"There are different circumstances the SEC will consider. The biggest circumstance is that they consider bitcoin to be a commodity and not a security," said Frank Borger Gilligan, a securities attorney at Dickinson Wright, in an interview with Reuters. He said that the SEC would want assurances that any new products had investor safeguards.
When CNBC asked Grayscale CEO Michael Sonnenshein if it will take another lawsuit to force the SEC to approve ether ETFs, he said it was "too early to say.”