SEC Sets Criteria for Spot Crypto ETFs: Collaboration with CFTC and Coinbase

Recent developments surrounding the US Securities and Exchange Commission's (SEC) allocation of spot exchange-traded funds (ETFs) for digital assets are particularly promising. With the presence of a robust futures market, the SEC appears to be shifting course, which could have far-reaching implications for investors and the crypto market as a whole. In this context, a recent filing from the Chicago Board Options Exchange (CBOE) offers valuable insight into how the SEC might approach crypto ETF approvals in the future.

The SEC's Crypto ETF Listing Standard

According to Bloomberg ETF analyst Eric Balchunas, a key SEC requirement is that the digital assets must have been traded as futures contracts for at least six months. This means that assets that have been on the futures market for some time are eligible for approval. Balchunas points out that Coinbase's derivatives platform will serve as a reference market for the intended issuers. It is undeniable that Coinbase, as the largest cryptocurrency exchange in the US, plays a central role in this.

It's notable that Coinbase offers a wider range of crypto futures than the Chicago Mercantile Exchange (CME), making it a more representative benchmark for the SEC. In addition to Coinbase's native futures, this includes those of the CME, encouraging the SEC to consider this market a key benchmark. This could gradually provide investors with safer access to the crypto market, especially as these futures gain more mainstream recognition.

James Seyffart, also an analyst at Bloomberg, adds that this approach gives the Commodity Futures Trading Commission (CFTC) the authority to determine which tokens qualify for futures trading. Should the SEC adopt this rule as proposed, it would implicitly authorize assets already accepted for futures trading to be converted into spot ETFs. This innovative approach clearly demonstrates how the authorities are trying to align their supervisory role with the growing crypto industry.

Which crypto assets are eligible?

The proposed rules would allow ETF issuers to list spot products for primary tokens that have already established a solid track record of trading. Some of these tokens include Bitcoin, Ethereum, Litecoin, and XRP, as well as Dogecoin, Cardano, Solana, and Shiba Inu have secured their place with over six months of trading activity on Coinbase's derivatives marketplace.

However, newer or more speculative tokens, such as Bonk and Trump Coin, will have to follow a different route, as they lack the necessary futures markets. These assets can utilize the Investment Company Act of 1940, ideal for a more restrictive and complex structure known as the "40 Act." Balchunas points to the REX Shares Solana ETF as a potential model for these assets. While this alternative structure allows for the launch of products without a 19b-4 filing, most issuers prefer the Securities Act of 1933 for spot ETFs due to its simpler compliance and direct market exposure.

Frequently Asked Questions

What would be the implications of SEC approval of crypto spot ETFs?
Approval would increase investor access and could usher in a new era for institutional investment in crypto assets. This would enhance market liquidity and boost the overall adoption of digital assets.

Which tokens are the most promising for spot ETFs?
Bitcoin, Ethereum, and Litecoin are the most promising candidates, given their long-term presence on futures markets and substantial trading volumes. These assets seem well-positioned to serve as the foundation for the first crypto spot ETFs.

How does SEC regulation affect newer tokens?
Newer tokens without established futures markets will face complex hurdles. They will have to rely on alternative structures, such as the 40 Act, which can hinder their access to the broader investment market.