BlackRock Contends SEC Lacks Basis for Distinguishing Between Crypto Futures and Spot ETFs

BlackRock challenged the SEC’s inclination towards the 1940 Act, overseeing futures ETFs, asserting its lack of relevance to both crypto-spot and crypto-futures ETFs.

BlackRock contends that the U.S. Securities and Exchange Commission lacks a valid justification for treating spot-crypto and crypto-futures exchange-traded fund applications differently. 

The official confirmation of BlackRock’s plan for a spot-Ether (ETH) ETF, named the “iShares Ethereum Trust,” was made on Nov. 9, with Nasdaq submitting the 19b-4 application form to the SEC on BlackRock’s behalf.

We did an article on that here. 

In the application, BlackRock questions the SEC’s approach to spot crypto ETFs, asserting that the agency’s repeated denials are based 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.”

While the SEC has approved several crypto futures ETFs, it has not yet given the green light to any spot-crypto ETF applications. 

The regulatory body attributes this distinction to the perceived enhanced regulation and consumer protections offered by the 1940 Act, which governs crypto futures ETFs, in contrast to the 1933 Act covering spot-crypto ETFs. Additionally, the SEC seems to prioritise regulatory and surveillance-sharing agreements over the Chicago Mercantile Exchange’s (CME’s) digital asset futures market. 

BlackRock contends that the SEC’s preference for the 1940 Act is irrelevant in this context, emphasising that it imposes restrictions on ETFs and sponsors rather than 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.”

BlackRock pointed out that with the SEC’s approval of crypto futures ETFs via the CME, it has conclusively affirmed that CME surveillance is capable of detecting fraud in the spot market, impacting spot ETPs. 

From BlackRock’s perspective, this leaves the SEC without a justifiable reason to reject the current application. 

There is a prevailing belief among crypto and ETF analysts that the first SEC approval for a spot crypto ETF, possibly related to Bitcoin, is imminent. 

Bloomberg ETF analysts James Seyffart and Eric Balchunas anticipate a 90% likelihood of approval before January 10 next year.