SEC Reviews Bitwise Hybrid ETF Combining Bitcoin and Ethereum

The U.S. Securities and Exchange Commission (SEC) has initiated a formal review of a groundbreaking application from Bitwise, proposing a first-of-its-kind Hybrid ETF that combines exposure to both Bitcoin and Ethereum in a single investment vehicle. This move comes after the landmark approvals of spot Bitcoin ETF products earlier this year, placing the regulatory body once again in the spotlight for cryptocurrency investors and market watchers.

The Bitwise Bitcoin Ethereum Hybrid ETF proposal, filed by NYSE Arca, seeks to create an exchange-traded fund that holds physical Bitcoin and Ethereum. This structure is particularly noteworthy because it moves beyond single-asset crypto ETFs, signaling a potential path for more complex, multi-asset crypto investment products in the future. The initial proposed asset allocation reflects the current market value shares of the two cryptocurrencies, approximately 83% Bitcoin and 17% Ethereum. While this initial allocation is based on market capitalization, the fund’s strategy for rebalancing or adjusting this mix over time will be a critical point of regulatory scrutiny and investor interest.

The SEC’s decision to initiate a review is a standard procedural step for any new ETF application. However, the context surrounding this review is significant. The regulatory landscape for crypto ETFs in the U.S. has evolved rapidly, with the approval of spot Bitcoin ETFs setting a precedent for physically-backed crypto funds. While the path for a spot Ethereum ETF is still uncertain, with the SEC currently reviewing multiple applications, the Bitwise hybrid proposal adds another layer of complexity. The SEC’s review process typically involves an initial filing and public notice, an opportunity for public comments, an internal staff review regarding market manipulation concerns, investor protection, and custody arrangements, potential extensions of the review period, and ultimately, an approval or disapproval order. Reviewing a Hybrid ETF requires the SEC to consider the regulatory implications of holding two distinct, albeit correlated, crypto assets within a single fund structure. This includes assessing the risks associated with each asset individually and the potential interactions or correlations between them.

For investors, a Hybrid ETF like the one proposed by Bitwise could offer several compelling advantages. These include simplified diversification, convenience and accessibility, potential cost efficiency, regulatory clarity, and targeted exposure. This type of product caters particularly to investors who see value in both the ‘digital gold’ narrative of Bitcoin and the smart contract/decentralized application ecosystem of Ethereum. However, the proposal faces significant hurdles and raises important considerations, including regulatory uncertainty, correlation and concentration risk, allocation management, custody and security, and market manipulation concerns. These challenges are not unique to Bitwise but are inherent in creating regulated financial products based on nascent and volatile asset classes like cryptocurrencies.

The SEC’s decision on the Bitwise Hybrid ETF could have far-reaching implications for the future of crypto investments in the U.S. An approval would set a precedent for multi-asset crypto ETFs, signal increased regulatory comfort with combining different cryptocurrencies in regulated products, and potentially pave the way for ETFs including other large-cap altcoins or baskets of cryptocurrencies. A disapproval, on the other hand, could reinforce a cautious stance from the SEC regarding complex crypto products or highlight specific concerns related to the hybrid structure or the regulatory status of Ethereum. For investors, the review process itself provides valuable insight into the SEC’s evolving perspective on crypto. It underscores the ongoing maturation of the crypto market as it intersects with traditional finance. Keeping an eye on the public comments submitted to the SEC and the rationale behind their eventual decision will be crucial for understanding the future trajectory of crypto ETFs.

The SEC’s initiation of a review for the Bitwise Bitcoin and Ethereum Hybrid ETF proposal marks a significant step in the evolution of crypto investment products in the U.S. This novel fund structure aims to offer investors simplified, regulated exposure to the two largest digital assets. While the potential benefits in terms of convenience and diversification are clear, the proposal faces complex regulatory hurdles related to the hybrid nature and the differing statuses of Bitcoin and Ethereum. The outcome of the SEC’s review will not only determine the fate of this specific fund but could also shape the future landscape for multi-asset crypto ETFs and the broader regulatory approach to digital assets.