In a recent development, two Democratic Senators, Jack Reed (D-R.I.) and Laphonza Butler (D-CA), have urged the U.S. Securities and Exchange Commission (SEC) to halt the approval of any further crypto exchange-traded products (ETPs). The Senators expressed their concerns in a letter addressed to SEC Chair Gary Gensler, citing risks associated with poor broker disclosure and thin liquidity in major cryptocurrencies, which they believe could harm retail investors.

The Senators’ letter highlighted a FINRA survey that revealed a staggering 70% of brokers’ communications with retail investors violated fair disclosure rules. The lawmakers pointed out instances where brokers falsely equated cryptocurrency with cash and provided misleading explanations of cryptocurrency’s risks. They argued that these “alarming deficiencies” raise significant concerns about the quality of information provided to retail investors regarding Bitcoin ETPs.

Furthermore, the Senators contended that naming these products as “Bitcoin exchange-traded funds” could be misleading, as it “obfuscates important characteristics about these investments.” They emphasized the need for retail investors to be made aware of the differences between these ETPs and more common funds, particularly in terms of the protections offered under the Investment Company Act of 1940.

The lawmakers also expressed doubts about the trading volumes and integrity of cryptocurrencies other than Bitcoin (BTC), which they referred to as the most established and scrutinized cryptocurrency. They argued that retail investors would face enormous risks from ETPs based on these cryptocurrencies, as their prices are especially susceptible to pump-and-dump or other fraudulent schemes.

In response to the Senators’ concerns, Coinbase chief legal officer Paul Grewal took to social media platform X (formerly Twitter) to counter their arguments. Grewal pointed out that the evidence suggests the opposite of what the Senators claimed, highlighting the fact that Ether (ETH), the second-largest cryptocurrency and a potential candidate for an ETF, has a higher trading volume than many S&P 500 stocks.

He further noted that ETH’s spot market is deep and liquid, with only one S&P 500 stock having lower adjusted bid-ask spreads. Grewal also mentioned that Coinbase had addressed the Senators’ concerns in a comprehensive 27-page comment letter sent to the SEC.

The news of the Democratic Senators’ letter to Gary Gensler prompted a reaction from Eric Balchunas, a senior ETF analyst at Bloomberg. In a series of posts on social media platform X, Balchunas expressed his views on the matter. He suggested that the blockbuster success of the Bitcoin ETF has upset high-ranking Democrats, leading to a sense of buyer’s remorse. Balchunas believes this development contributes to his pessimistic outlook on the chances of a spot ETH ETF being approved.

Balchunas also found it interesting that the Senators mentioned correlations between ETH futures and spot prices, suggesting that this could be a “tell.” He speculated that the Senators might have been fed a study conducted by the SEC, which could potentially be used as a basis for rejecting spot ETH ETFs. Balchunas described this as “foreshadowy” at the very least.

Additionally, Balchunas noted that the term “ETP” is technically what 33 Act funds should be referred to, although most casual observers may not be familiar with this terminology. He expressed a feeling that someone from the SEC might have assisted the Senators in writing the letter, given the specific language used and the reference to correlations between ETH futures and spot ETH.

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