After the U.S. Securities and Exchange Commission (SEC) solicited opinions on its approach to reviewing "new type" exchange-traded products, several crypto institutions publicly opposed the imposition of uniform restrictions. Grayscale, venture capital firm a16z, and the Crypto Innovation Committee believe that products involving crypto assets should not automatically be subject to additional restrictions or treated under the same framework merely because they are classified as "new type."
Oppose unified classification into one category
Three institutions submitted their opinions on August 31st. This day also marks the deadline for the 60-day consultation period for SEC. The consultation period began on June 30th and covered a range of topics including crypto assets, commodity instruments, individual stock strategies, high-leverage products, blockchain-related products, private equity assets, and event contracts.
Their common view is that these products differ in structure, liquidity, valuation methods, and custody risks, and therefore should not be subject to the same regulatory framework just because they are all labeled as "new types" of products.
a16z indicates that SEC should be assessed item by item based on the economic structure of the product and the underlying risks, rather than by asset category. The institution believes that the infrastructure of the regulated crypto market has significantly developed, and disclosure practices as well as listing standards for exchanges are also maturing gradually. This leads to substantial differences between certain digital asset products and private equity securities funds or high-leverage strategy products.
Grayscale also opposes the imposition of new holding conditions or additional disclosure requirements merely because regulators classify a certain type of product as "new." The company believes that funds with a track record of compliance should continue to be governed by existing regulations based on their legal structure and underlying assets.
Investment firms become the focus of attention
A core issue in this round of public consultation is: if a product primarily invests in non-securities assets, is it still possible for it to be classified as an investment company under the Investment Companies Act of 1940?
According to current objective tests, if the proportion of an issuer's investment securities in its total unconsolidated assets exceeds 40%, and after deducting government securities and cash, it may fall into the category of an investment company. SEC will also make a subjective judgment by considering the issuer's business activities, public statements, management methods, and sources of income.
Grayscale, a16z and the Crypto Innovation Committee all oppose modifying these existing tests, which would automatically bring exchange-traded products holding non-security assets under the supervision of investment companies. Such changes could affect commodity trusts and also impact many crypto products that are currently established outside the framework of the 1940 Investment Company Act.
Spot crypto products typically adopt a structure based on commodity trusts, rather than being registered as open-end investment companies. When approving spot Bitcoin products in January 2024, they were also commonly referred to as such, rather than another designation. This distinction affects the governance structure, registration requirements, and investor protection arrangements, but it does not directly determine whether the products can be listed for trading on national exchanges.
Industry requires coordinated review processes.
In addition to regulatory requirements, the review process is also a focal point of industry attention. Currently, fund registration documents are typically reviewed by the SEC Investment Management Department, while exchange listing applications are handled by the Trading and Market Department. These two processes operate in parallel but are not always synchronized.
a16z calls on SEC to coordinate these two reviews and provide a more predictable timeline. The reason is that even if the issuer resolves the issues with their registration documents, they may still have to wait due to the uncertain progress of the exchange's listing approval process.
Grayscale and the Cryptographic Innovation Committee support the establishment of an optional confidential pre-communication mechanism, allowing issuers to identify legal or disclosure issues before publicly submitting materials. They believe that this will help reduce the need for repeated revisions of documents and also shorten delays that could be avoided.
SEC has not yet announced the next steps. This round of soliciting opinions did not propose any formal rules, nor was a deadline for decision-making set, nor were any products automatically restricted. Next, SEC may issue guidelines, propose draft revisions, adjust internal review processes, or choose not to take further action for now.
