After the U.S. Securities and Exchange Commission (SEC) recently allowed the first bitcoin exchange-traded funds (ETFs) following a legal fight with Grayscale Investments, 12 asset managers want to introduce more crypto products. They have applied for 25 new cryptocurrency ETFs, some of which are riskier and more intricate than the current ones, according to Reuters.
The latest wave of crypto ETFs will be made up of products that would monitor ether’s price, the second largest cryptocurrency after bitcoin, as well as those that would rely on options to leverage bitcoin volatility. These products aim to bring more investors into the already popularized and expensive crypto space. Bitcoin hit $57,000 on Feb. 27th for the first time in over two years, while ether has gained 12% this year.
SEC Caution Delays Approval Of Bitcoin ETFs
The SEC, however, would not likely approve the new products in the near future because it is skeptical of cryptocurrencies and complex exchange-traded products. For more than a decade, the spot bitcoin ETFs have been denied by the SEC due to fears of market manipulation and investor protection issues; therefore, they were approved last month after they had lost to Grayscale in court, contesting the SEC basis for rejecting its application.
According to Gary Gensler, SEC Chair, the approval of bitcoin ETFs did not mean a change regarding his firm’s position about crypto assets; he cautioned that this product was very risky and thus it would be wrong for SEC to give endorsement to listing standards applicable for digital coins in general. Gensler also added that the regulator would continue examining illegal activities like fraud in the cryptocurrency market.
The ether’s legal status is unclear, and it is not known if the SEC has authorized it as a securities or commodity. This poses a problem for potential ether exchange-traded funds, as these will call for different regulatory frameworks and disclosures.
Caution Urged Amidst Risky Crypto ETFs
Some of these crypto ETFs are meant for day traders who seek profits from bitcoin and ether price changes. These include leveraged ETFs that would magnify bitcoin returns or losses by using borrowed funds and inverse ETFs, which would help the investors bet against bitcoin prices. These products are very risky, as they expose investors to the high volatility of cryptocurrencies and margin calls and liquidations.
The SEC has approved many leveraged and inverse ETFs in the past, but it has also warned about their dangers and limitations. In 2018, a volatility-tracking exchange-traded note collapsed, resulting in $2 billion in losses for investors. In 2020, the SEC limited the leverage of ETFs to 200%, and it is expected to review its rules on exchange-traded fund risks this year.
The SEC would have to monitor and regulate a completely unregulated and decentralized market, which is the main challenge of new crypto exchange-traded funds. The regulator will have to collaborate with other relevant bodies, such as CFTC (Commodity Futures Trading Commission) and FINRA (Financial Industry Regulatory Authority), to supervise the cryptocurrency sector.
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