Democrats Urge SEC’s Gensler to Halt Approval of Additional Crypto ETPs

Senators Express Concern Over “Enormous Risks” Faced by Retail Investors Due to Thin Order Books in Certain Crypto

Two Democratic Senators are urging the Securities and Exchange Commission (SEC) to prevent the approval of any further crypto exchange-traded products (ETPs) to safeguard retail investors against risks stemming from inadequate broker disclosure and thin liquidity in major cryptocurrencies.

Senators Jack Reed (D-R.I.) and Laphonza Butler (D-CA) cited a FINRA survey revealing that 70% of brokers’ communications with retail investors violated fair disclosure rules. They emphasized that brokers’ communications often misrepresented cryptocurrency as cash and provided misleading explanations of its risks, raising concerns about incomplete and deceptive information being provided to retail investors regarding bitcoin ETPs.

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The Senators also contended that labeling bitcoin exchange-traded funds as such obscures crucial characteristics of these investments. They stressed the importance of ensuring that retail investors understand the differences between these ETPs and more conventional funds, noting that bitcoin lacks the same protections under the Investment Company Act of 1940 as ETFs holding shares of various companies.

Additionally, the lawmakers highlighted concerns about the susceptibility of Bitcoin (BTC) and other cryptocurrencies to misconduct, particularly pump-and-dump or other fraudulent schemes. They argued that other cryptocurrencies lack the trading volumes and integrity necessary to support associated ETPs, posing significant risks to retail investors.

In response to these concerns, Coinbase’s Chief Legal Officer, Paul Grewal, countered the Senators’ assertions. Grewal pointed out that ether (ETH), expected to be the next digital asset with an ETF, boasts higher trading volume than many S&P 500 stocks and has a deep and liquid spot market. He emphasized that Coinbase had addressed the Senators’ concerns in a 27-page comment letter submitted to the SEC.