Crypto industry urges SEC to avoid blanket novel ETF restrictions

Regulators love a good shortcut. It is easier to build a single, reinforced wall than it is to build several custom gates. Right now, the Securities and Exchange Commission is trying to build a wall around crypto ETFs by labeling them as novel products. It sounds like a technical distinction, but for founders and investors, it is a massive bottleneck that threatens the future of institutional crypto access.

The Novelty Trap

When the SEC calls something novel, it is usually a polite way of saying they intend to drag their feet. Historically, exchange-traded products have followed a predictable path toward approval. If you followed the rules, the timeline moved. But the commission is now looking at ways to create a blanket category for any ETP that involves digital assets. This would essentially strip away the nuance of individual products, treating a spot Bitcoin fund the same way they might treat a complex, multi-token derivative fund.

Groups like Grayscale, Andreessen Horowitz, and the Crypto Council for Innovation have filed comments urging the SEC to reconsider this approach. Their argument is simple: classification should be based on the actual mechanics of the fund, not just the fact that it involves a blockchain. If the SEC succeeds in creating a broad novel category, it creates a permanent second-class status for crypto-related financial products.

Why Builders Should Care

You might think this is just a battle for the suits at BlackRock and Fidelity, but this affects the entire pipeline of capital. When the SEC adds friction to the ETF process, they are effectively raising the cost of capital for every project in the space. ETFs are the bridge to the massive pools of liquidity held in retirement accounts and traditional portfolios. If that bridge is gated by arbitrary novelty restrictions, the entire industry stays smaller for longer.

For founders building the next generation of decentralized finance or tokenized real-world assets, this regulatory stance is a signal. It tells us that the SEC is not interested in understanding how these assets differ from one another. To them, it is all just crypto, and therefore, it is all dangerous until proven otherwise. This lack of granularity is a major hurdle for innovation.

The Risk of One-Size-Fits-All

The danger of a blanket restriction is that it ignores the risk profiles of different assets. We know that Bitcoin behaves differently than Ethereum, and both behave differently than a basket of small-cap tokens. By lumping everything into a novel category, the SEC is choosing to ignore the data that has been built up over the last decade.

• It slows down the approval process for even the simplest products.
• It creates a high barrier to entry that only the largest financial institutions can afford to navigate.
• It discourages the development of new, more efficient ways to give investors exposure to digital assets.

The industry leaders are proposing a different route. They want the SEC to stick to the existing frameworks that have worked for decades. If a product meets the criteria for a traditional ETP, it should be treated as such. The fact that the underlying asset is a digital token should not trigger a complete overhaul of the review process.

The Speed of Traditional Finance

In the tech world, we move fast. In the regulatory world, fast is a decade. The current friction is not just about safety; it is about control. By labeling these products as novel, the SEC gives itself the power to hold them in a state of perpetual review. This is not how you build a healthy financial market. You build a market by providing clear rules and then getting out of the way so people can compete.

The SEC’s current trajectory suggests they would rather be safe and stagnant than allow for modern growth.

We saw this same pattern with the spot Bitcoin ETF. It took years of litigation and public pressure to finally get it across the finish line. The SEC did not approve it because they finally understood it; they approved it because they were forced to. This latest push for novel restrictions is a way for them to regain that stalled control.

The Path Forward

If we want a functional ecosystem, we need the regulators to acknowledge that crypto has grown up. The novelty phase ended years ago. We have robust pricing data, institutional-grade custody, and a clear demand from the public. The industry's pushback against these blanket restrictions is a necessary step in demanding maturity from the commission.

Builders need to keep their eyes on these filings. They may seem dry, but they are the blueprints for how we will be allowed to grow. If the SEC is allowed to bucket everything as novel, the path to mainstream adoption becomes a lot steeper and much more expensive.

The SEC is attempting to use the novel label as a catch-all tool to slow down crypto integration. By treating diverse digital assets as a single risky category, they are ignoring the reality of the market. Builders and investors must support a more granular approach to regulation, or risk being stuck in a permanent state of regulatory purgatory.

Read the original at Cointelegraph →