Grayscale’s Solana ETF Dreams Hit a Regulatory Wall

US regulators are preparing to reject the first proposed Solana exchange-traded funds (ETFs) backed by actual tokens, two people familiar with the matter said recently. 

The regulator has tipped off at least two issuers that their requests will advance to denial and is now indicating that it’s unlikely in the current administration additional cryptocurrency ETFs would be approved, the persons said.

The ruling might affect multiple asset managers looking to launch products based on Solana, reflecting a broader reluctance to consider expanding cryptocurrency investment opportunities through ETFs.

Solana Trust Conversion Plans Hindered

One of the major players in crypto asset management, Grayscale Investments, applied to convert its eligible Solana Trust into an official spot ETF with ticker “GSOL” last month. The trust now presides over $134.2 million in assets, reflecting an impressive level of market interest. 

The news comes this week after Grayscale filed its application to take advantage of increasing demand for more convenient crypto-focused investments.

But a harder line from the SEC could make it difficult for not just Grayscale but other companies that have eyed Solana ETFs as well. It joins a group of industry bigshots, including VanEck, 21Shares, Bitwise, and Canary Capital LP, competing to enter the market with investment vehicles pegged to Solana.

Broader Implications For Crypto ETFs

It sounds like the regulator has done a lot more than just act against Solana. That skepticism spreads to other digital assets, including XRP and ETFs tracking Bitcoin and Ethereum. 

The companies’ fates notwithstanding, ETFs on Bitcoin and Ethereum have on occasion shown some progress, but newer projects like Solana may also be receiving increased scrutiny.

Much of the legal wrangling has focused on whether Solana is a security under current SEC regulations. This classification could have profound implications for the regulator’s decision to accept ETFs pegged to the asset.

Last month, the SEC declined Cboe BZX’s filings for two Solana ETFs due to a lack of establishment on Solitude’s legal policy position. These precedents only make the possibility of new approvals even grimmer in the near future.

Economic Mystification Intensifies 

This has proved frustrating to many within the industry who were hopeful that the SEC would move forward with adding further crypto-based ETFs. Representatives of asset managers counter that ETFs offer ways for ordinary investors to gain exposure to digital assets in a safe, regulated manner. 

Even so, the SEC has repeatedly cited market manipulation and inadequate surveillance as a justification for its reluctance. This regulatory stance makes it complicated for firms seeking to diversify their offerings in the ever-expanding digital asset market. 

For the companies, including Grayscale and VanEck, who have already invested a considerable amount in creating ETF products, they will now see their timeline delayed with an UNKNOWN result at the end.

What lies ahead for crypto ETFs?

If the SEC continues to resist, the fate of cryptocurrency ETFs outside of Bitcoin and Ethereum markets appears bleak. 

However, the regulatory hurdles faced by Solana specifically serve as examples of larger, thornier questions of how assets are classified and how markets will be watched that will surely take some time to sort through.

In the meantime, the industry continues to follow what regulators have in store in case there are any changes of tone that might break open the space for more new investment products. 

However, the inability for new crypto ETFs to press on acts as a stark reminder that regulatory constraints are one of the main restraining forces against this sector.