There have been a few interesting crypto updates in the U.S. over the past day. The United States Securities and Exchange Commission (SEC) has extended its review period for the proposed Spot Ether ETF by Invesco and Galaxy Digital. The SEC also adopted new rules expanding its oversight by redefining the terms "dealer" and "government securities dealer," targeting market participants involved in activities like market making, with the rules affecting those managing assets of at least $50 million. Meanwhile, the Federal Reserve concluded its enforcement against Farmington State Bank, connected to the FTX saga, marking an end to the bank's operations and its involvement in cryptocurrency ventures.
The SEC Extends Review Period for Ethereum ETF
The United States Securities and Exchange Commission (SEC) once again caught the attention of the crypto community after it announced a delay in its decision on the approval of a Spot Ether (ETH) exchange-traded fund (ETF) proposed by Invesco and Galaxy Digital. In a recent notice, the SEC stated its intention to initiate proceedings to decide on the proposed rule change that would allow the Cboe BZX Exchange to list and trade shares of the Invesco Galaxy Ethereum ETF. This move to open the proposed investment vehicle to public comment extends the decision deadline by an additional 35 days after its publication in the Federal Register.
The commission has the option to postpone its decision on the Invesco Galaxy Spot Ether ETF for up to 240 days. The filing for the ETF was set in October of 2023, with its publication in the Federal Register happening in November, setting a final decision deadline by July 2024.
This delay comes just after the SEC's approval of spot Bitcoin ETFs from several asset managers, which began trading on U.S. exchanges on Jan. 10. Many considered this was a huge step forward for cryptocurrency investments, even signaling a potential openness from the SEC to approve similar products in the future. Currently, the SEC is reviewing applications for spot ETH ETFs from various firms, including BlackRock, Hashdex, ARK 21Shares, VanEck, and Fidelity.
The approval of spot BTC ETFs was exciting because of the simultaneous green light given to 11 applications, a strategy some now speculate could be the case again for spot ETH ETFs. However, the SEC has been very tight-lipped, offering few public comments on its plans. Among all of the contenders, VanEck stands out as the most likely to receive an early decision, with an SEC deadline set for May 23.
SEC Expands Oversight with New Rules
In other SEC news, the regulator adopted new rules on Feb. 6 that aim to bring a broader range of market participants under its regulatory scrutiny. The rules, which span 247 pages, redefine the terms "dealer" and "government securities dealer" as outlined in the Securities Act Rules and modify the interpretation of "as a part of a regular business" within the context of the Securities Exchange Act of 1934.
The essence of the new rules is to include market participants who play big roles in providing liquidity to the markets. According to the new definitions, a dealer might be identified by their trading activities that align closely with market making, like expressing trading interest near the best available prices for both buying and selling the same security, or earning revenue from bid-ask spreads and trading incentives. SEC Chair Gary Gensler believes that the rules are a matter of common sense and that anyone engaging in such de facto market making activities has to register as a dealer, aligning with Congress's original intent. An important threshold set by the new rules is that dealers must manage or control assets of at least $50 million to fall under this regulation.
The rules were passed in a party-line vote, receiving opposition from the two Republican SEC members, who criticized the move as an overreach. The debate over these rules has been ongoing since they were first proposed back in 2022, which, despite only mentioning cryptocurrency in a footnote, drew criticism from the crypto industry and its advocates. In contrast, the final rule includes an entire section dedicated to crypto, clarifying that the dealer framework applies based on the securities trading activities, regardless of the security type.
The new regulations have naturally sparked a mix of reactions among SEC members. Republican Mark Uyeda condemned the change as an overreach and warned of the SEC's claimed jurisdiction's immense scope. However, Commissioner Caroline Crenshaw supported the changes, pointing out a loophole that allowed people to engage in dealer-like activities without the needed registration. The rules are set to take effect 60 days after their publication in the Federal Register.
Federal Reserve Concludes Enforcement on FTX-Connected Bank
Meanwhile, the Federal Reserve Board also announced on Feb. 6 that it has concluded its enforcement action against Farmington State Bank, which was once connected to FTX, and its holding company, FBH Corporation. This decision comes after the bank effectively ceased operations as a banking institution, after the Fed's July 2023 directive aimed at winding down its activities and safeguarding depositor interests.
Originally known as Moonstone, Farmington State Bank was implicated in the dramatic FTX saga through an $11.5 million transaction from Alameda Research, FTX's sister company, coursed through FBH Corporation in March of 2022. The Fed's enforcement action in August 2023 was part of broader attempts to disentangle the bank from its cryptocurrency connections and to ensure the protection of its depositors, especially in the light of the FTX collapse in November of 2022.
The fallout from the FTX collapse had massive impacts across the financial and crypto sectors, pushing Farmington to announce its plans to abandon crypto ventures and return to its foundational role as a community bank.
