The chances of approval for the pending spot Ethereum exchange-traded fund (ETF) applications this May are strained as two US Senators urged the Securities and Exchange Commission (SEC) to reject other crypto ETF proposals.

In the March 11 letter to SEC Chair Gary Gensler, Senators Jack Reed and Laphonza Butler advised the financial regulator to tighten its scrutiny of Bitcoin ETFs.

Lawmakers urge SEC to halt other crypto ETF approvals

The lawmakers raised concerns about approving additional crypto ETFs beyond Bitcoin, citing potential risks for retail investors.

They argued that other cryptocurrencies, like Ethereum, lack sufficient trading volumes and integrity to support related ETPs. Additionally, they doubt that futures markets for these cryptocurrencies will closely correlate with spot markets, making it challenging to conduct effective market surveillance and prevent fraudulent activities.

They added:

“The SEC should strictly limit the precedential application of these approvals. While the bitcoin market has displayed serious weaknesses, it is nonetheless far more established and scrutinized than the market for any other cryptocurrency. However vulnerable Bitcoin may be to fraud and manipulation, markets for other cryptocurrencies are far more exposed to misconduct.”

As such, they concluded that the financial regulator should protect retail investors “from ETPs referencing thinly traded cryptocurrencies or cryptocurrencies whose prices are especially susceptible to pump-and-dump or other fraudulent schemes.”

The lawmakers’ letter arrived when Bloomberg analysts significantly lowered the probability of a spot Ethereum ETF approval to 35%.

Eric Balchunas, Bloomberg’s Senior ETF Analyst, suggested that the success of the Bitcoin ETFs might have unsettled some politicians, contributing to the pessimism surrounding the approval of spot ETH ETFs.

SEC could face lawsuits

Paul Grewal, the legal chief at Coinbase, highlighted the potential for significant legal conflicts should the SEC decide to decline the pending Ethereum ETF applications.

Grewal stressed that numerous digital asset commodities, including Ethereum, boast market quality metrics surpassing even the most substantial traded equities.

According to him:

“When compared to bitcoin, ETH’s future and spot market demonstrate EXACTLY the same type of high and consistent correlation that would enable market surveillance.”

Consequently, Grewal argued that the SEC’s refusal of an Ethereum ETF application would be grounded in flawed reasoning, given the robust market performance exhibited by Ethereum and similar digital assets.