The SEC’s delay in predicting markets for ETFs has echoes of the bitcoin fund battle

Markets predict ETFs may come to retail investors and even retirement plans, but perhaps not as quickly as expected.

The Securities and Trade Commission during Trump’s second administration has sought to distance itself from Biden-era regulators by what it calls a move away from “regulatory regulation” that it says stifles markets and innovation. But it caught some in the financial industry off guard on Tuesday when it delayed the launch of 24 forecast market ETFs, saying it needed more time to study the products before they were released to investors.

Roundhill Investments, Bitwise, and GraniteShares all filed with the SEC in February to launch funds tied to prediction markets that include elections, economic data, and other real-world events. Under SEC rules, ETFs automatically expire 75 days after filing unless otherwise designated by the SEC. That 75-day window was supposed to expire last week. The intervention of the SEC should not be surprising, according to ETF experts, even if the SEC under the Trump administration focuses on measures to reduce access to the market, and less aggressive supervision of novel financial products, such as in the crypto space.

Futures markets for ETFs represent a new type of regulatory challenge. Unlike traditional ETFs, these investments are tied to event contracts and actually place bets on real-world events. Some of the most notable, but also controversial, contracts in prediction markets like Kalshi are those related to politics, such as election results, which are the focus of ETFs.

The delay in ETF forecasting markets evokes memories of the years it took for spot bitcoin ETFs to be approved by the SEC. But ETF experts say the delay is likely to be temporary as the agency looks for more information from producers about how the funds will work. “With any kind of novel exposure to an ETF, there are always going to be some last-minute hiccups,” said Todd Sohn, chief ETF strategist at Strategas Securities. “You can switch to any new asset class and ETF. Usually that’s when things get pushed back a bit,” he said.

“We recognize that new ETF products often require additional review, particularly regarding liquidity, market structure, and investor protection. Our priority is to ensure that investors are comfortable with how these products work and understand the role they can play within the regulated ETF structure,” said GraniteShares CEO Will Rhind in a statement to CNBC.

There’s a reason regulators take it slow. A novel private credit ETF launched by State Street last year has run into a number of SEC hurdles after being introduced by ETF experts who say it should have been part of the pre-approval review process.

But the most obvious comparison is spot bitcoin ETFs, which faced years of resistance from the SEC before finally getting approval in January 2024. Regulators spent months battling concerns about market manipulation and whether the underlying crypto markets were mature enough to take on a regulated investment product. Before approving spot bitcoin ETFs, the SEC repeatedly rejected many applications, arguing that issuers failed to demonstrate how they would prevent fraud or crypto fraud.

“Investor protection and focusing on market manipulation … is very important to me and obviously to the SEC. That’s in our DNA,” SEC Chairman Paul Atkins said recently on CNBC’s “Squawk Box.”

Questions about insider trading in the prediction markets have increased recently.

The Commodity Futures Trading Commission has primary oversight of the futures markets, but Atkins said in testimony before the US Senate in February that the SEC needs to play an active role in regulating this new area of ​​financial activity. “Prediction markets are one thing where there is a lot of dominance,” Atkins said. “That’s a big issue that we’re focused on. … Mainly, at least for now, on the CFTC side. But we need to be consistent in how we deal with these markets.”

“Are speculation markets being used? Is there inside information going on between those markets?” Sohn said. “The ETF wrapper is proven. It works, it’s simple, it’s transparent. It’s more about the markets they will follow,” he added.

The eventual approval of spot bitcoin ETFs required legal battles and political pressure. Greyscale successfully challenged the agency in federal court in 2023 after judges said the SEC failed to explain why it treats bitcoin futures differently than bitcoin futures ETFs. Kalshi sued the federal government in a subsequent case where he won the right to bid on contracts in the 2024 presidential election.

According to Anthony Capozzolo, an attorney at Lewis Baach Kaufmann Middlemiss who specializes in legal and regulatory matters, the unique aspect of this case is the relationship of the Trump family with the operators of the prediction markets. Donald Trump Jr. he is an advisor to both Kalshi and Polymarket, and is associated with a firm that has an investment stake in the latter. “At the very least, they want to better understand what impact these ETFs can have [be] to retail customers,” Capozzolo wrote in an email to CNBC.

Sohn believes that despite the delay, the broader regulatory approach within the Trump administration leads him to the conclusion that the institution’s suspension does not present a serious objection to the basic concept of forecasting ETF markets. “I think all plans go, until I see otherwise on the SEC’s website,” Sohn said. But he added that there are valid questions to be asked about the underlying trading of prediction markets like Kalshi which are still young and do not have a long history of testing liquidity or market depth. “When it was growing, I didn’t know how deep it was in the market,” he said.

This week, Kalshi announced that it has raised another $1 billion from investors for a total of $22 billion, doubling its amount from six months ago. It revealed that investors’ optimism was mainly due to the growth of their institutional trading business. The company said in its release that in the past six months, the trading volume of the center has increased by 800%, representing an annual trading volume that has grown from $52 billion to $178 billion.

Nate Geraci, ETF expert and president of NovaDius Wealth Management, wrote in an email that the delay reflects reasonable caution rather than hostility, and draws a clear line on how the SEC handled ETF bitcoins.

“ETFs have a long history of pushing boundaries to open up access to new investments and asset classes,” Geraci wrote. “Given the newness of the ETF prediction market, the SEC clearly requires that the risks be properly disclosed to investors and that these products perform as intended.”

Geraci pointed to different structural issues including what happens if there is a dispute about whether the event contract should be settled. “This delay shows that even with a lenient SEC, it doesn’t simply green light every ETF filing that comes across its desk,” he wrote.

The SEC is the ultimate arbiter of how long the delay will last and what conditions will be imposed before approval. From the outside looking in, it’s hard to know what will lead to resolution and when it will happen. “Unless you’re the issuer and have conversations with them, it’s hard to know what the issues are,” Sohn said.

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a small investment by CNBC.

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