The Securities and Exchange Commission (SEC) has taken a step that could reshape the way cryptocurrencies are traded and, ultimately, how they are valued. In late September, the regulator adopted rules that allow for generic listing standards for exchange-traded funds (ETFs) backed by digital assets.
In practice, this means a wider array of cryptocurrencies could soon find their way into investment vehicles once reserved for mainstream equities and commodities.
The immediate effect will be proliferation. Fund managers will no longer need to petition the SEC on a case-by-case basis to list ETFs tied to specific coins. That is expected to accelerate the launch of products tracking tokens beyond bitcoin and ether — the two dominant names in the market so far.
Coins such as Avalanche’s AVAX and Cardano’s ADA, once confined to the margins of crypto exchanges, may now be wrapped into funds accessible to retail investors at the click of a button. Visibility, convenience and liquidity are all set to rise.
Is this a win for the crypto industry?
On first reading, this looks like an unambiguous win for the crypto industry. Greater institutional acceptance, easier access for the public and a sheen of regulatory legitimacy all point in a bullish direction. But experience north of the border offers a cautionary tale.
Canada was an early mover in authorising crypto ETFs, and its market has already grappled with the consequences of abundance. 3iQ, a Toronto-based investment manager that pioneered several of the country’s first crypto funds, warns that the sheer pace of new product issuance makes it difficult for issuers to raise capital or sustain differentiation.
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For investors, the hazard is confusion. To the casual buyer of ETFs, the distinction between one token and another is far from obvious. A portfolio holding Avalanche’s AVAX may behave very differently from one tied to Cardano’s ADA, given their divergent technological foundations and adoption trajectories.
Yet once bundled into ETF wrappers, the subtleties risk being obscured. The result could be a market where funds proliferate faster than investors’ ability to discern between them, producing volatility and disappointment.
A thinning of the herd?
In the longer run, however, such Darwinism could prove healthy. ETFs will expose tokens to a broader audience and, by extension, a harsher market test. Assets with genuine use cases, strong communities and the ability to capture retail imagination are likely to thrive. Others may find themselves ignored, their liquidity drying up as investors concentrate on the few that prove their worth. The flood of products, in other words, may eventually give way to a thinning of the herd.
That process will have broader consequences. If crypto ETFs follow the path of sector-specific equity funds, a handful of dominant products could come to serve as benchmarks for pricing and sentiment, further entrenching certain coins. It may also push issuers to experiment with new structures, combining multiple tokens or linking them to decentralised finance strategies in an effort to stand out. Regulators, meanwhile, will face the task of monitoring an expanding menu of funds, each with its own risks and quirks.
For crypto’s evangelists, the SEC’s move is a milestone: digital tokens are being placed on the same supermarket shelf as blue-chip equities and government bonds. For sceptics, it is another round of speculative froth. For investors, the message is simpler. The choice is about to get broader. Whether it will also get clearer is another matter.
