SEC's DeFi Dilemma: ETF Delays Highlight Regulatory Uncertainty

The U.S. Securities and Exchange Commission (SEC) faces mounting pressure as Bitwise Asset Management files a proposal for the first exchange-traded fund (ETF) tracking Hyperliquid’s native token, HYPE, signaling a pivotal shift toward decentralized finance (DeFi) exposure in traditional marketstitle1^[1]. Hyperliquid, a Layer 1 blockchain optimized for perpetual futures trading, has a market capitalization of $11 billion, ranking it 21st globally. The Bitwise Hyperliquid ETF, if approved, would be the first regulated vehicle offering direct exposure to a DeFi token, mirroring the structure of recently launched Bitcoin and Ethereum spot ETFstitle3^[2]. The filing comes as the SEC delays decisions on multiple altcoin ETFs, including proposals for Solana (SOL), XRP, and Litecoin (LTC), highlighting the regulator’s cautious approach to expanding crypto product offeringstitle3^[3].

The SEC’s recent reversal on Bitwise’s broader crypto ETF—the BITW fund—exemplifies the regulatory uncertainty. Initially approved in July 2025, the fund was abruptly paused hours later under delegated authority, with Assistant Secretary Sherry Haywood citing the need for further reviewtitle2^[4]. This move underscores internal divisions within the SEC, as Chair Paul Atkins pushes for clearer crypto regulations while some commissioners resist rapid approvals. Analysts attribute the delays to the SEC’s pursuit of generic listing standards, which could streamline future approvals but remain unimplementedtitle4^[5]. The BITW fund, designed to track a market-cap-weighted index of major cryptocurrencies, reflects growing demand for diversified crypto exposure, yet its fate remains in regulatory limbotitle4^[6].

Market reactions to DeFi-focused initiatives have been mixed. HYPE’s price rose 4% following the Bitwise filing, reaching $42, as investors bet on increased institutional interest in DeFi projectstitle3^[3]. However, the SEC’s protracted review of altcoin ETFs has created a backlog of over 90 applications, with deadlines extending into late 2025title6^[7]. While Bitcoin and Ethereum ETFs have attracted billions in assets under management, altcoin proposals face heightened scrutiny over liquidity, custody arrangements, and market manipulation risks. For instance, the SEC has repeatedly delayed approvals for Solana and Cardano ETFs, demanding robust surveillance-sharing agreements to monitor trading activitytitle6^[8].

The regulatory landscape is evolving rapidly. The SEC’s proposed generic listing standards, expected later in 2025, aim to reduce approval timelines from 240 days to 75 days by establishing predefined criteria for crypto ETFstitle9^[9]. This framework would prioritize tokens with established futures markets or strong liquidity metrics, potentially excluding smaller altcoins. Bloomberg Intelligence analyst James Seyffart estimates a 90–95% chance of approval for XRP, Solana, and Litecoin ETFs before year-end, contingent on the SEC finalizing its standardstitle2^[4]. Meanwhile, Grayscale and Franklin Templeton are converting existing crypto trusts into ETFs, leveraging precedents set by the Bitcoin ETF conversion to bypass prolonged reviewstitle8^[10].

For investors, the DeFi ETF trend presents both opportunities and risks. While regulated access to DeFi tokens could enhance liquidity and legitimacy, the SEC’s delays have created a fragmented market. Institutional players are cautiously entering the space, with JPMorgan and Goldman Sachs expanding crypto custody services, while retail investors remain wary of speculative altcoinstitle5^[11]. The approval of Hyperliquid’s ETF could catalyze broader adoption of DeFi projects, but the SEC’s focus on investor protection suggests a phased rollout. As the regulatory environment matures, the coming months will be critical in determining whether DeFi ETFs become a cornerstone of institutional crypto portfolios or remain a niche segment.