Democrats Ask SEC's Gensler to Block Approval of More Crypto ETPs

Two Democrat Senators are urging the Securities and Exchange Commission (SEC) to block any further crypto exchange-traded products (ETPs) to protect retail investors from risks associated with poor broker disclosure and thin liquidity in major cryptocurrencies.

Sen. Jack Reed (D-R.I.) and Sen. Laphonza Butler (D-CA) write that a FINRA survey disclosed that 70% of brokers’ communications with retail investors violated fair disclosure rules.

“Brokers’ communications falsely equated cryptocurrency with cash; in others, they provided misleading explanations of cryptocurrency’s risks,” they wrote. “These alarming deficiencies raise significant concerns that brokers and advisers may now provide incomplete and deceptive information about bitcoin ETPs to retail investors.”

The Senators also argue that by naming bitcoin exchange-traded funds as such, the name “obfuscates important characteristics about these investments.”

“Retail investors should be made aware of how these ETPs differ from more common funds which they may have experience,” they said in the letter, writing that bitcoin is not subject to the same protections under the Investment Company Act of 1940 that ETFs which hold shares of various companies would have.

The two lawmakers also say that bitcoin (BTC) – which they call the most established and scrutinized cryptocurrency – is displaying weakness, and other cryptos are far more susceptible to misconduct.

“We do not believe that other cryptocurrencies show the trading volumes or integrity to support associated ETPs,” they wrote. “Retail investors would face enormous risks from ETPs…whose prices are especially susceptible to pump-and-dump or other fraudulent schemes.”

“Respectfully, Senators, the evidence points exactly the opposite way,” Coinbase chief legal officer Paul Grewal wrote in a post on X.

Grewal pointed out that ether (ETH), thought to be the next digital asset to have an ETF, has a higher trading volume than many S&P 500 stocks.

“ETH’s spot market is deep and liquid,” he wrote. “Only one S&P 500 stock has lower adjusted bid-ask spreads,” Grewal added that Coinbase had addressed the senators’ concerns when it sent a 27-page comment letter to the SEC.

“Crypto is an important building block in updating our financial system for everyone,” he concluded.