BlackRock argues SEC has no grounds to treat crypto futures and spot ETFs differently

BlackRock has argued that the U.S. Securities and Exchange Commission doesn’t have any legitimate reason to treat spot-crypto and crypto-futures exchange-traded fund applications differently.

BlackRock’s plan for a spot-Ether (ETH) ETF called the “iShares Ethereum Trust” was officially confirmed on Nov. 9, after Nasdaq submitted the 19b-4 application form to the SEC on the firm’s behalf.

In its application, BlackRock called the SEC’s treatment of spot crypto ETFs into question, as it asserted that the agency bases its reasons for continually denying these applications on incorrect regulatory distinctions between futures and spot ETFs.

“Given that the Commission has approved ETFs that offer exposure to ETH futures, which themselves are priced based on the underlying spot ETH market, the Sponsor believes that the Commission must also approve ETPs that offer exposure to spot ETH.”

I took Scott’s advice and read Blackrock’s argument for approval of a spot ETH ETF.

It’s very compelling.

The argument flows from Grayscale’s DC Circuit victory: the SEC can’t lawfully approve ETH futures ETFs but not a spot ETH ETF. I agree.

Read here: https://t.co/7mwYNWDHRo https://t.co/fAgVBnOBZZ

— Jake Chervinsky (@jchervinsky) November 10, 2023

The SEC has yet to greenlight a single spot-crypto ETF application, but has approved a host of crypto futures ETFs,

The securities regulator has indicated that this is due to crypto futures ETFs having supposedly superior regulation/consumer protections under the 1940 Act as opposed to the 1933 Act that covers spot-crypto ETFs.

Additionally, the SEC also appears to favor the regulation and surveillance-sharing agreements over the Chicago Mercantile Exchange’s (CME’s) digital asset futures market.

BlackRock argues, however, that the SEC’s preference for the 1940 Act lacks relevance in this area, as it places “certain restrictions on ETFs and ETF sponsors” and not the underlying assets of the ETFs.

“Notably, none of these restrictions address an ETF’s underlying assets, whether ETH futures or spot ETH, or the markets from which such assets’ pricing is derived, whether the CME ETH futures market or spot ETH markets.”

“As a result, the Sponsor believes that the distinction between registration of ETH futures ETFs under the 1940 Act and the registration of spot ETH ETPs under the 1933 Act is one without a difference in the context of ETH-based ETP proposals.”

Related: BlackRock iShares Ethereum Trust registered in Delaware

BlackRock outlined that as the SEC has approved crypto futures ETFs via the CME, it has “clearly determined that CME surveillance can detect spot-market fraud that would affect spot ETPs.”

As such in the firm’s eyes it essentially leaves the SEC with no justifiable reason to reject the application under its current line of thinking.

I suggest reading this 19b-4 filing closely, specifically the arguments presented in the “Applicable Standard” section (starting pg 12). Keep an eye on (1) ’40 Act/’33 Act discussion and (2) significant markets test analysis.

It will likely serve you well in the future. https://t.co/tlemiQzgbr

— Scott Johnsson (@SGJohnsson) November 9, 2023

It is generally thought among crypto and ETF analysts that the first SEC approval of a spot crypto ETF — in the form of a Bitcoin related one — is only around the corner.

Bloomberg ETF analysts James Seyffart and Eric Balchunas predict a 90% chance of an approval sometime before Jan. 10 next year.

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?