According to Reuters, the US Securities and Exchange Commission (SEC) expects to drag out the new wave of crypto ETFs

By Suzanne McGee and Hannah Lang

(Reuters) – Buoyed by the successful launch of Bitcoin exchange-traded funds (ETFs) in the U.S., asset managers are lining up to launch a second wave of more complex crypto products, setting the stage for another fight with the U.S. securities regulator .

The Securities and Exchange Commission (SEC) rejected spot Bitcoin ETFs for more than a decade, hoping to protect investors from market manipulation. But the SEC had to approve it last month after Grayscale Investments won a court challenge. A federal appeals court ruled that the SEC did not provide sufficient detail in its reasoning for rejecting the products.

This decision encouraged 12 asset managers, including Grayscale, ProShares, VanEck, Invesco, Fidelity and Ark Investments, to submit applications to launch 25 next-generation cryptocurrency ETFs.

Many are complex products that would use options to amplify Bitcoin’s volatility. Others would track the price of Ether, the No. 2 cryptocurrency after Bitcoin.

Investors hope the new products will help push cryptocurrencies further into the mainstream. On February 12, it hit $50,000 for the first time in over two years and Ether is up more than 12% this year on hopes the SEC will approve spot products.

Still, the SEC remains unhappy with cryptocurrencies and complex exchange-traded products, and lawyers and industry officials said they expect the agency to take a cautious approach. The legal status of Ether is also unclear, they noted.

“It doesn’t look like there’s a rush to approve a second wave of products,” said Yesha Yadav, a professor specializing in digital asset regulation at Vanderbilt University, adding that the SEC will have to “deal with it.” how much risk she could handle.

SEC Chairman Gary Gensler remains a crypto critic. When he approved the Bitcoin ETFs, he warned that they were very risky and said the decision did not mean the SEC was ready to approve listing standards for crypto assets more broadly.

An executive at one issuer said it was unclear whether SEC approval of the Bitcoin ETFs would pave the way for other products.

Some filings before the SEC relate to products designed for day traders: Leveraged Bitcoin exchange-traded products would aim to generate returns by further amplifying the cryptocurrency’s significant volatility. Other uses include inverse products, which allow speculators to bet on a price decline.

The SEC has approved many inverse and leveraged ETFs but was cautious after a volatility-tracking exchange-traded note failed in 2018, costing investors $2 billion in losses. In 2020, ETF leverage was capped at 200% and the agency will review its rules on ETF risks in line with its regulatory agenda this year.

Gensler and Democratic SEC Commissioner Caroline Crenshaw have also warned about the risks of inverse and leveraged ETFs. The SEC would formally stop the launch of these products only if it determined their disclosures were materially misleading, people familiar with the matter said. However, they added that this could delay the effective date of a filing or suggest an issuer should withdraw it if staff have concerns.

James Angel, an associate professor of finance at Georgetown University, said the SEC would likely avoid rejecting applications outright, which could lead to a legal challenge.

“I think they will look for any details or excuses they can to delay the process,” he added.

There is no clear process for SEC approval of options on Bitcoin ETFs, which are typically approved a few days after an ETF launches, so approval could take months in the future, Reuters reported this month.

ProShares, Invesco, Fidelity and Ark Investments declined to comment or did not respond to requests for comment.

ETHER BATTLE?

Since the spot Ether ETFs were a new product and would require a rule change, the SEC must approve or reject them within a set deadline. VanEck’s application must first be decided on May 23, while the deadline for Grayscale’s Ether application is June 18.

The SEC has not yet had specific discussions with issuers on the filings but is expected to begin meetings next month, two other people familiar with the matter said. The agency has not yet published meetings about the products in its public minutes.

When asked about the spot Ether ETF filings this month, Gensler told CNBC that the SEC’s five commissioners would be reviewing them. Both Democratic commissioners voted against the Bitcoin ETFs, while the two Republicans voted in favor. That means Gensler would likely have the deciding vote.

The arguments Grayscale used to defeat the SEC in its Bitcoin ETF lawsuit could apply to Ether products because the circumstances are similar. However, some regulatory experts and issuers said Gensler could argue that Ether is a different type of asset.

The SEC has said Bitcoin is a commodity but has not made a decision on Ether. Unlike Bitcoin, Ether is traded on a so-called “proof-of-stake” blockchain, which allows users to earn yield by locking tokens for a specific period of time. Gensler questioned whether this setup resembles a traditional security.

“There are various circumstances that the SEC will consider. The most important circumstance is that they view Bitcoin as a commodity and not a security,” said Frank Borger Gilligan, a securities attorney at Dickinson Wright, who said the SEC wanted assurances for all new products that there were investor protections in place.

When asked by CNBC last week whether another lawsuit would be needed to force the SEC to approve Ether ETFs, Grayscale CEO Michael Sonnenshein said it was “too early to tell.”