The Securities and Exchange Commission (SEC) is facing pressure from Congress to halt the approval of new cryptocurrency exchange-traded products (ETPs) due to concerns about risks posed to retail investors.

According to a letter written to the regulator on March 11, Senators Jack Reed and Laphonza Butler emphasized the dangers posed by inadequate disclosure by brokers and insufficient liquidity in major cryptocurrencies.

Brokers under Scrutiny

The senators mentioned: "We write to urge the Securities and Exchange Commission (SEC) to take steps to protect investors following its recent approval of the listing and trading of certain spot Bitcoin exchange-traded products (ETPs)."

"The SEC's approvals have provided a green light for Wall Street to sell volatile cryptocurrency investments to ordinary Americans through their brokerage and retirement accounts."

Senators Reed and Butler highlighted findings from a survey conducted by FINRA revealing that 70% of brokers' communications with retail investors violated fair disclosure rules. Specifically, the legislators raised questions over brokers falsely equating cryptocurrency with cash and providing misleading explanations of cryptocurrency risks. Such deficiencies reportedly highlight incomplete and deceptive information regarding Bitcoin ETPs.

Risk Factors

The legislators argue that labeling spot Bitcoin ETFs as such obscures important characteristics, potentially misleading retail investors. They stressed the need for investors to understand the differences between ETPs and traditional funds.

Additionally, Reed and Butler expressed skepticism about the integrity of cryptocurrencies , particularly highlighting the vulnerability of Bitcoin and its susceptibility to fraudulent schemes. They warned of the risks retail investors could face from ETPs linked to cryptocurrencies, especially those prone to price manipulation.

In January, the SEC approved 11 spot Bitcoin ETFs. This happened after years of anticipation and rejections, signaling a significant shift in how investors can access and engage with cryptocurrencies on traditional financial platforms.

The approval of spot Bitcoin ETFs simplified retail investors' access to cryptocurrencies, enabling them to trade crypto through their brokerage accounts. This eliminates the need for separate crypto exchanges and mitigates risks associated with direct holdings, such as security breaches and fraud.