Should Spot Bitcoin Products Be Called ETFs? Some Say No

That would really hit the spot.

The Securities and Exchange Commission in June put out a call for public comment on so-called novel strategies, including those that would resemble event contracts or gambling. The request has brought in more than 80 letters so far from lawyers, industry associations and individual investors, mainly calling for more regulatory clarity. But others have loftier aims; one group, the Mutual Fund Directors Forum, filed a comment last week calling for products not regulated by the Investment Company Act of 1940 to be barred from using the ETF title. If that happened, it would apply to 3.4% of all those funds’ net assets — or more than $530 billion of US ETF assets.

“You’ve seen a lot of evolution in what’s offered in an ETF structure in the last couple of years,” said Carolyn McPhillips, president of MFDF. “There’s a question [of], ‘Should all of this actually be in an ETF wrapper?’”

A Little Too Novel?

Because many spot crypto products’ underlying digital assets — like bitcoin or ether — are treated as commodities rather than securities under current US law, most of these ETFs aren’t regulated by the ’40 Act. Spot crypto has been available in exchange-traded-product form since early 2024, and funds like iShares’ Bitcoin Trust ETF (IBIT) and Fidelity’s Wise Origin Bitcoin Fund (FBTC) have been breaking records since then. In its letter, MFDF said that funds not regulated by the ’40 Act should be excluded from the ETF name because of the implication of oversight by an independent board of directors. “When you call something an ETF, that implies a certain amount of regulatory oversight, certainly oversight by fund boards,” McPhillips said. “That is not necessarily true in those types of products.”

Other filers have voiced similar concerns:

• The long-term investing nonprofit FCLTGlobal argued that event contracts-based and prediction market ETFs should not be allowed to obtain the ETF structure.
• A letter from Better Markets said funds holding futures contracts tracking sports teams “are so novel that they bear no resemblance” to ’40-Act products, and should thus be barred from the ETF format.

What’s In a Name? For years, the SEC denied spot crypto product applications due to concerns about market manipulation and inadequate investor protection. Reversing years of approvals, however, would be a significant undertaking, especially given the agency’s recent proposal that could allow certain crypto assets to fall outside securities law. For McPhillips, the agency’s recent moves are beside the point. “They can be called exchange-traded products. They can be called something else,” she said. “Having that distinction is important for shareholders.”