Senators Jack Reed (D-RI) and Laphonza Butler (D-CA) penned a letter to SEC Chair Gary Gensler earlier this week urging the Commission to halt the approval of further crypto exchange-traded products (ETPs) in U.S. markets. 

The letter, which began circulating on social media late Thursday, highlights concerns regarding inadequate risk disclosures in communications between brokers and retail investors. It culminates in requesting that the SEC strictly curtail the approval of bitcoin ETF applications going forward, and to deny all future products derived from other cryptocurrencies.

Notably, while the Senators’ concerns stemmed in general from the problems associated with ensuring risk disclosures across all cryptocurrency markets, they admitted that bitcoin held a somewhat privileged position among cryptocurrencies, writing that the number one digital asset by market cap “is far more established and scrutinized than the market for other cryptocurrency.”

A Distinction With a Difference

In their letter, the Senators said they were concerned that technical distinctions in the definitions of bitcoin-based financial instruments had left significant gaps in necessary risk disclosures. Citing a FINRA review of communications between brokers and retail investors about cryptocurrency, the Senators pointed out that about 70% of these communications violated fair disclosure rules, with some brokers equating cryptocurrency with cash and others providing misleading explanations of cryptocurrency risks.

Senators Reed and Butler argued that industry participants have purposefully mislabeled the 11 bitcoin ETPs that received approval in January 2024 as “exchange-traded funds (ETFs),” claiming that, despite certain similarities, the difference between ETPs and ETFs is significant in terms of regulatory protections. 

They wrote:

Because Bitcoin ETPs are not subject to the substantive and structural protections under the Investment Company Act of 1940, they are not subject to restrictions on harmful practices that apply to most investment funds marketed to retail investors including mutual funds and ETFs. These include a fiduciary duty, limits on leverage, custody requirements, corporate governance requirements, prohibitions on conflicted practices cover restrictions on fees and expenses chargeable to investors, and examination by the SEC. The use of terms such as “Fund” or “ETF” imply that the full protections of the investment Company Act would apply but unfortunately, they do not.”

Read more: Grayscale Files to Spin Off Lower-Fee ‘Bitcoin Mini Trust’ From GBTC

The letter acknowledged that registered ETPs still enjoy “several basic protections,” including public risk disclosures and “general prohibitions on fraud and manipulation”; however, they insist retail investors have the right to be made aware of “how the ETPs differ from the more common funds with which they may have experience.”

To address these issues, the Senators recommended the SEC take several actions: ensure that brokers and advisors provide complete and accurate information about bitcoin ETPs, verify that recommendations of cryptocurrency ETPs are in the clients’ best interests, and prevent the use of “inappropriate and confusing naming conventions in SEC filings and other investor documents.”

Industry Response

In response to the Senators’ concerns, Paul Grewal, Chief Legal Officer at Coinbase, argued that digital asset commodities, including bitcoin, exhibit market quality metrics surpassing many of the largest traded equities. 

In a series of tweets, Grewal highlighted the deep liquidity and market quality of Ethereum’s spot market, suggesting a level of market surveillance capability comparable to traditional securities markets. He also referenced a detailed comment letter submitted to the SEC, advocating for the approval of an Ethereum ETP, backed by extensive legal, technical, and economic analysis.

Read more: Spot Bitcoin ETFs Finally Receive SEC Seal of Approval

The SEC’s approval of 11 Bitcoin ETFs in January 2024 came after years of legal discussions, attracting applications from both crypto-focused firms such as Grayscale Investments and ARK Invest, as well as traditional financial giants like BlackRock and Fidelity. This development marked a significant milestone in the integration of cryptocurrency products into mainstream financial markets, as well as billions of dollars of inflows into the new funds. The market exuberance has also coincided with a new bull run in crypto markets, with bitcoin setting a new all-time high of $73,580 on March 14, according to CoinGecko.