Bitcoin ETFs fueled hopes for other crypto ETFs — but don’t get too excited

Welcome back to Distributed Ledger. This is Frances Yue, crypto and markets reporter at MarketWatch.

The first approved bitcoin
BTCUSD,
-0.02%
ETFs have now been trading for two weeks, with BlackRock and Fidelity leading the race after the U.S. Securities and Exchange Commission greenlighted such products on Jan. 10.

Some crypto investors now are hoping to see ETFs based on smaller cryptocurrencies, such as ether
ETHUSD,
-0.16%,
also receive the SEC’s approval down the road. 

However, it may be too early to get excited, according to Stephanie Breslow, partner and co-head of the investment-management group at law firm Schulte Roth & Zabel.  

Find me on X at @FrancesYue_ to share any thoughts on crypto or the newsletter.

The securities debate

“Bitcoin itself is not a security. Nobody even was able to identify an issuer,” Breslow told Distributed Ledger.

“But for other crypto, there is still a dispute in many cases between the SEC and other market participants about which cryptocurrencies are securities, and whether the crypto that were once securities are still securities,” she said.

SEC Chair Gary Gensler once said that bitcoin was the only crypto he was prepared to publicly label a commodity, rather than a security.

In June, the SEC separately sued crypto exchanges Coinbase and Binance. While the lawsuits contain different allegations, both contend that the companies ran unregistered securities exchanges. Both lawsuits are still ongoing. 

In July, U.S. District Judge Analisa Torres ruled that Ripple Labs’ crypto token XRP
XRPUSD,
0.00
is not a security when sold on digital-asset exchanges to the general public, but that Ripple’s sales to sophisticated institutional investors did qualify as an unregistered sale of investment contracts, in violation of federal law.

In October, the same judge refused to let the SEC appeal the decision.

It’s important to watch the developments and rulings of such lawsuits, according to Breslow. “Those court cases are not in themselves directly about whether you could have an ETF, but I do think that finding the boundaries between what is and what isn’t a security will be relevant to which crypto end up being capable of being wrapped into ETFs,” Breslow said. 

“If the SEC is thinking that a given crypto is a security and that various exchanges should not be trading it [and] it shouldn’t be open to U.S. markets, then likely they would not be allowing an ETF around that crypto,” she added.

Still, even if a crypto is not considered a security, there remains the question of whether the market for it is large and rational enough, according to Breslow. 

“In the case of bitcoin, it is very widely traded. Something that is more thinly traded wouldn’t really support an ETF,” she said.

Trump’s stance on crypto

As former U.S. president Donald Trump cruises toward the Republican Party nomination for the 2024 presidential election, some crypto supporters are putting their faith in a potential second Trump administration. 

However, a careful look at Trump’s term in office could cast doubt on those hopes, writes MarketWatch’s Chris Matthews.

“Bitcoin, it just seems like a scam,” Trump told Fox Business in 2021. “I don’t like it because it’s another currency competing against the dollar.”

In 2019, amid controversy over Facebook’s Libra cryptocurrency project, Trump lamented that the value of cryptocurrencies is “based on thin air.”

Read more about it here.

Crypto in a snap

Bitcoin fell 6.2% in the past seven days and ether lost about 12.2% during the same period, according to CoinDesk data.

Must-reads

  • Terraform Labs files for bankruptcy following crash of its stablecoins in 2022 (MarketWatch)

  • ‘It was just a facade’: CEO charged with stealing $150 million in crypto scam (MarketWatch)

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