Samara Cohen, BlackRock’s CIO for ETF and Index Investments, stated clearly in a recent Bloomberg interview that Bitcoin and Ethereum will remain the primary cryptocurrencies traded through ETFs for the foreseeable future. Cohen listed a number of issues that make it difficult to include additional cryptocurrencies, including Solana.
Photo: Bloomberg
ETFs Technical Hurdles and Liquidity Concerns
The technological infrastructure and liquidity issues that come with a lot of cryptocurrencies are among the main challenges. Cohen clarified that the Securities and Exchange Commission (SEC) requires the CME and other regulated market venues to maintain sufficient management and surveillance over the underlying markets. This is to guarantee the openness and integrity of the ETF products that the SEC has approved.
Regulators like the SEC continue to see a large number of cryptocurrency exchanges—which would otherwise be the main places where altcoins are traded—as “unregulated securities exchanges.” It is challenging for the Commission to confirm the integrity of the markets and offer the required investor safeguards because of this regulatory ambiguity.
BlackRock’s head of digital assets, Robert Mitchnick, had similar worries, saying, “I don’t think we’re gonna see a long list of crypto ETFs” anytime soon. A major obstacle is the lack of market depth and liquidity for cryptocurrencies, as the SEC wants to protect investors from any manipulation and uncertainty in the market.
Dominance of Bitcoin and Ethereum
The enormous market shares of Bitcoin and Ethereum are another issue that is hurting the chances of altcoin ETFs. Industry data indicates that these two cryptocurrencies—Bitcoin owning 55% and Ethereum 17%—account for an astounding 72% of the whole market capitalization of cryptocurrencies.
Photo: Bloomberg
Solana is among the last cryptocurrencies that account for less than ten percent of the market. The two market heavyweights already have well-established investment vehicles, so it will be difficult for the SEC to defend the establishment of ETFs for smaller, more speculative cryptocurrencies, given their prominence.
Head of financial research at Sygnum Bank Katalin Tischhauser reiterated this opinion, saying that she did not believe there would be much demand for ETFs that went beyond Bitcoin and Ethereum. Only half as many people are familiar with Ethereum as there are with Bitcoin, while other tokens (like Solana) are barely known outside of the cryptocurrency space.
Sygnum Bank research head remains skeptical about altcoin ETFs
Katalin Tischhauser, head of investment research at Sygnum Bank, told Cointelegraph that cryptocurrencies other than Ether and Bitcoin are unlikely to be approved as spot ETFs in the U.S. due to a lack of…
— CoinNess Global (@CoinnessGL) August 5, 2024
Since the SEC is likely to give priority to products that show evident and significant investor demand, altcoins hoping to get approved as ETFs face a major obstacle due to their lack of recognition and adoption outside of the cryptocurrency community.
Grayscale’s Struggle and Lackluster Demand
Further information on the possible difficulties facing cryptocurrency ETFs may be gained from the performance of already-existing investment products with a crypto component, such as Grayscale’s Solana Trust (GSOL). The fund’s very modest AUM of $78.6 million, in comparison to Grayscale’s Bitcoin and Ethereum trusts, demonstrates a limited general interest in Solana-based financial products, according to Tischhauser, who also pointed out that the high premium on GSOL implies some demand.
The sluggish initial trading performance of the recently introduced spot Ether ETFs, in which total withdrawals dominated the first week of trading, emphasizes even more the possible lack of investor interest in altcoin-focused financial products. A withdrawal from the Grayscale Ethereum Trust, which continues to maintain a healthy $6.3 billion in AUM despite the withdrawals, is mostly to blame for this trend.
These weak demand trends imply that, except for Bitcoin and Ethereum ETFs, the cryptocurrency market may look very different, with investors maybe continuing to be more circumspect and choosy about which altcoins they invest in.
Obstacles to Compliance and Regulation
Altcoin ETFs confront substantial regulatory obstacles in addition to technological and market-related ones. The goals of the SEC’s mandate are to safeguard investors, stop market manipulation, and uphold the integrity of the financial system. This indicates that the Commission will probably go cautiously and methodically when deciding whether to approve new financial products based on cryptocurrencies.
Since the SEC could depend on the CME’s authorized market venues for market surveillance and control, the presence of CME futures for Bitcoin and Ethereum allowed a regulatory workaround for the first licensing of spot Bitcoin and Ether ETFs. The majority of cryptocurrencies, however, do not have easy access to this regulatory route, which makes it more difficult for them to get approved as ETFs.
Regulators continue to struggle with understanding the intricacies of cryptocurrency markets and developing suitable frameworks for monitoring them, both domestically and abroad. Due to the constantly changing and frequently ambiguous regulatory framework, asset managers looking to introduce cryptocurrency ETFs have extra compliance issues.
The Solana ETF Approval in Brazil – A Glimmer of Hope?
Although the future of cryptocurrency ETFs in the United States seems grim, a recent event in Brazil may provide some optimism. The first Solana spot ETF in Brazil was authorized by the Brazilian Securities and Exchange Commission (CVM) in August 2023. It was managed by Vortx and was predicated on the CME CF Solana Dollar Reference Rate.
This decision is a big step forward since it shows that authorities in some countries could be more open to allowing the incorporation of cryptocurrencies into traditional financial products. It is anticipated that the introduction of the Solana ETF in Brazil would improve institutional and ordinary investors’ access to cryptocurrencies and may open the door for similar approvals in other states.
It is yet unclear, nevertheless, if this Brazilian event will have an important impact on US regulations or those of other large markets. Even while other authorities seem more accommodating, the SEC’s worries around market manipulation, liquidity, and technical infrastructure challenges might yet prove to be major obstacles.
The Way Ahead: Perseverance and Patience
Although the short-term prospects for ETFs may seem dismal, industry professionals advise that persistence and patience may eventually pay off. Some asset managers are nevertheless devoted to exploring these investment products in spite of the regulatory obstacles, as seen by VanEck’s SEC filing for a Solana ETF.
The head of research for digital assets at VanEck, Matthew Sigel, has disputed the idea that Ethereum and Bitcoin will be the only cryptocurrencies approved as ETFs. Sigel gave the range of cryptocurrency ETPs that are now offered in the European market—such as basket options and single-coin options—as an illustration of how the US market may be more diversified.
The future of altcoin ETFs will mostly depend on asset managers’ and cryptocurrency firms’ capacity to resolve the technical, liquidity, and regulatory issues that have impeded their adoption thus far. This might entail building stronger compliance procedures, investing in market infrastructure, and maintaining contact with regulators.
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