Galaxy: Which altcoin ETFs may receive rapid approval from the US SEC

Source: Galaxy Research; Compilation: AIMan@Bitchain Vision

Overview

On July 30, the Chicago Options Exchange (Cboe)’s BZX exchange, Nasdaq and New York Stock Exchange Arca submitted Form 19b-4 to the U.S. SEC, proposing to develop listing standards for cryptocurrency exchange-traded funds (ETFs) and speed up the process of public trading.Crypto ETF applications have surged in the past year since the first BTC Exchange Trading Products (ETPs) were approved in 2024.According to James Seyffert of Bloomberg Industry Research,There are currently 91 pending cryptocurrency ETF applications, including applications for 24 individual tokens and applications for index funds.(See the appendix for the complete list).This has resulted in a backlog of work for the SEC, where the agency must complete a cumbersome approval process in the new asset class, lacking clear regulations on which should be approved and which should not be approved.

The 19b-4 declaration document is a document submitted by self-regulatory organizations such as exchanges to the US SEC to propose rules changes.Upon submission, a 21-day public comment period will enter, and the SEC will decide to approve, reject or extend the review period within the initial 45-day period.The SEC may extend the review time by up to 240 days from the date of submission.The comment period for these proposals ended on August 25.The initial approval deadline is September 13, and the longest deadline for final approval is March 27, 2026.

Although the US SEC has historically the longest cycle of approving cryptocurrency ETP applications, the proposed rule changes in this case will greatly reduce the burden on the institution to face massive and growing cryptocurrency ETP applications.Plus, the SEC is more friendly to cryptocurrencies, we believe thatUS SEC may make final decisions before March 2026 deadline.

Traditional stock ETF fast track rules

The demand for a rapid approval process for cryptocurrency ETFs has already precedent in the traditional stock market, and the ETF market has experienced a similar surge in issuances.In September 2019, the U.S. SEC adopted Rule No. 6c-11 (commonly known as the “ETF Rules”) to modernize the regulatory framework of ETFs.This rule allows most ETFs that meet standardization conditions, such as daily portfolio transparency, flexibility in creating and redemption portfolios, and full disclosure of net asset value (NAV), premium/discount, bid-ask spreads and positions on the website, thus operating under the Investment Companies Act 1940 without a separate exemption order.

The passage of this rule has completely changed the ETF market.Previously, ETF sponsors had to apply for and get exemptions on a case-by-case basis, a process that could take months or even years, and today’s cryptocurrency ETF industry is facing the same dilemma.ETF rules significantly reduce the time and cost required for ETF issuance.Today, the number of listed ETFs even exceeds the number of individual stocks.

Source: Morningstar, as of August 25

There are obvious similarities with the crypto ETF market.Just as the 6c-11 rule transforms traditional ETFs from a cumbersome case-by-case approval system to a standardized fast-track system, adopting a similar approach to crypto ETFs will also bring benefits such as certainty, efficiency and broader market access.Traditional ETFs grew exponentially after the implementation of the rules in 2019, suggesting that innovation and investor choice can expand rapidly when regulatory frictions decrease.Today, crypto ETFs are at the same turning point as stock ETFs before 2019, and despite the huge demand and market ready, they are still stagnant due to regulatory bottlenecks.A fast-track framework based on objective quantitative indicators (described below) will give the SEC the same expanded regulatory capacity without sacrificing investor protection.

Proposed criteria

Applications filed by Chicago Options Exchange (Cboe) BZX, Nasdaq and New York Stock Exchange Arca focus on three criteria for tokens to be eligible for rapid approval.The exchange proposes that as long as any of these conditions are met, the token’s supporting ETP should be eligible to enter the rapid approval process.Overall, these standards are designed to establish objective, standardized thresholds that qualify tokens for rapid review.They take into account market maturity, regulatory oversight and investor familiarity in combination.

Condition 1:“The commodity is traded in the Inter-market Oversight Organization (ISG) member market; however, the exchange can obtain information about the commodity transaction from the ISG members.”

Comment:This ensures that the underlying tokens are traded on markets belonging to cross-market oversight organizations, providing exchanges and the U.S. SEC with the cross-market visibility required to detect manipulation or violations of transactions.

Condition 2:“The commodity serves as the basis of a futures contract and the contract has been traded on the designated contract market for at least six months; provided that the exchange has entered into a comprehensive monitoring sharing agreement with the designated contract market, whether directly or through a joint membership of the ISG.”

Comment:This uses regulated futures markets (regulated by the Commodity Futures Trading Commission, with a trading history of at least six months) as a signal of depth, liquidity and established monitoring protocols.

Condition 3:“In the initial stage only, an exchange-traded fund aimed at providing an economic exposure of no less than 40% of its net assets value to commodities listed and traded on the National Stock Exchange.”

Comment:This suggests that if traditional ETFs already provide ≥40% asset exposure on national exchanges, the token has reached a certain level of institutional recognition and market infrastructure.

Qualified tokens

Galaxy Research reviewed the top 100 tokens with market cap to determine which tokens meet the criteria mentioned above or will soon meet the ETF’s fast listing criteria (BTC and ETH have been excluded from the analysis below because they already have ETFs).

There are 10 tokens in total that meet the fast listing standards: DOGE, BCH, LTC, LINK, XLM, AVAX, SHIB, DOT, SOL and HBAR.also,ADA and XRP will also meet the criteria soon, because they must be traded on the designated contract market (DCM) for a period of six months after their first listing.Here is a detailed list of tokens that meet the fast listing standards:

Condition 1:No other tokens except BTC and ETH meet the criteria, because no tokens are traded on the ISG member market.Although Coinbase’s derivatives exchange is an ISG member, the tokens traded on it are derivatives, not spot assets, and therefore does not meet this requirement.This situation is likely to change in the coming year as ongoing initiatives, including the Crypto Sprint announced by the U.S. Commodity Futures Trading Commission (CFTC) on August 1, are committed to enabling spot cryptocurrency trading on DCM.In addition, Project Crypto, launched by the US SEC on August 5, will explore the possibility of spot cryptocurrency trading on national security exchanges, which will substantially change the assessments made under this standard.

Condition 2:DOGE, LINK, XLM, BCH, AVAX, LTC, SHIB, DOT, SOL and HBAR should all meet the conditions, because they have been online for more than six months on Coinbase Derivatives (with the definition of DCM with a comprehensive monitoring sharing protocol).ADA and XRP are the only tokens that trade on DCM but are not eligible for lack of six-month transaction records, but they will reach six-month maturity in September and October, respectively.Of the 12 tokens that meet the criteria (or will soon be eligible), only 9 have unfinished ETF applications (DOGE, LTC, LINK, AVAX, DOT, SOL, HBAR, XRP, and ADA).Given that these tokens comply with the proposed fast-track rules, we think they are more likely to launch ETFs, which is very likely if the rule is passed.

Condition 3:XRP and SOL may also qualify, because they are all listed on national exchanges and the net asset value of their underlying tokens is “not less than 40%.Strictly speaking, these ETFs are futures ETFs tracking XRP and SOL contracts, but given that futures track the spot price of tokens, we think they may also qualify.

Assess possible future quantitative criteria

While the proposals only clarify the above three fast listing criteria, the exchange said in the filings that they would also submit a “separate rule proposal to add quantitative indicators as additional eligibility criteria.”The exchange has not disclosed specific content on these indicators, but journalist Eleanor Terett reported in July that the SEC is developing common listing standards, such as volume and liquidity, to obtain rapid approval of ETFs within 75 days after filing S-1 documents, which must be filed with the SEC for initial public offerings and certain other new securities offerings.

Based on the report and our own assessment, possible quantitative criteria include:

Trading volume:The minimum average daily trading volume on the registered exchange during the prescribed review period (i.e. 30 or 90 days).

Liquidity/buy and offer spread:Shows tight spreads and sufficient order book depth to support efficient ETF creation and redemption.

Market value/circulation supply:The minimum circulating market value threshold ensures that only widely held assets are eligible.

Hosting/Infrastructure Readiness:There are regulated custodians that can safely handle assets at scale.

Price History:Minimum transaction history (e.g. 6-12 months) to reduce the risk of extreme volatility in newly issued tokens.

On August 25, cryptocurrency industry organization The Digital Chamber and investment advisor Multicoin Capital Management submitted a letter of comment on the proposed rules.Under the above criteria, both companies have proposed quantitative measures, requiring a minimum market value of $500 million and daily trading volumes over the past six months to reach at least $50 million.Multicoin’s proposal goes a step further, proposing that at least 5% of global transaction volume, that is, an average daily transaction volume of $10 million occurs in the U.S. market.These requirements will make the top 70 cryptocurrencies with market cap eligible for rapid approval, provided they also meet one of the three initial criteria listed in the Initial Exchange Quick Approval Standards.This is also consistent with the view of Bloomberg ETF analyst Eric Balchunas, who said he believes the standards “may be loose enough that the vast majority of the top 50 cryptocurrencies can be ETFed.”

CLARITY Act

As more tokens get quick approval, the Digital Asset Market Clarification Act (the “CLARITY Act”) may also provide more standards.The bill is under consideration by Congress and is formulated in consultation with the US SEC.The CLARITY Act will create a unified framework for US digital assets; divide regulatory authority between the SEC and CFTC; confirm independent custody; protect developers from currency transfer laws; define when tokens should be considered securities or commodities; if the assets are decentralized enough (the “mature” in the CLARITY Act), they can be freed from securities processing.On July 17, the CLARITY bill received wide bipartisan support in the House of Representatives; the Senate is currently considering similar legislation.While the exact timeline remains uncertain, Sen. Cynthia Loomis, a Republican of Wyoming, recently set a goal to deliver a market structure bill to the president’s desk “before the end of the year.”Ultimately, if the Senate passes a certain bill, the two bills will need to be coordinated before they can be sent to the White House for signature into law.

Under the “quantitative standards” in the CLARITY Act, the following additional standards may be required:

control:Have “pre-determined and non-discretionary automated rules or algorithms” to eliminate dependence on external parties to maintain custody during transactions.

Open Source:The code of the blockchain system must be fully open source and publicly accessible, with a transparent version and no restrictions on participation.

Node participation:Blockchain must allow public operation and verification of participating nodes and quantify the distribution and independence of disclosed validators.Exchanges can set thresholds such as “no less than X validators” or “no more than 40% of the equity controlled by the top five validators”.

Transactions and status changes:The system must present a fully functional, programmatic ledger that can process transactions and update status transparently and predictably.Indicators can include daily transaction count, block interval and uptime reliability.

Governance:No individual or affiliated group shall hold more than 20% of governance/voting rights, and decisions must be based on rules and transparent.Exchanges may need to demonstrate decentralized governance mechanisms (on-chain voting, community proposals) and public record upgrade processes.

Decentralization threshold:A wider distribution of ownership is required; no issuer or affiliate shall own or control 20% or more of the total supply of tokens.

Issuance cap:The total value of the exemption is not exceeding $50 million during any 12-month period.

Related restrictions:The tokens held by insiders need to be locked for 12 months before maturity, and the maximum supply sold annually after the maturity period is 10%.

As more and more tokens are listed in regulated futures markets, the above criteria may become necessary to distinguish which assets truly reflect decentralization, technical resilience and investor protection, and which assets are only liquid or widely traded.In this sense, the CLARITY Act may provide a blueprint for distinguishing between tokens that have reached sufficient maturity and are worthy of inclusion in ETFs, and those that are still centralized, underdeveloped or opaque.In short, the combination of quantitative indicators proposed by the exchange and legislative maturity standards should ensure rapid approval of a wide range of large-cap and well-distributed tokens, while excluding projects that pose structural risks to investors and the market.

in conclusion

The lessons learned from the traditional ETF market are obvious: while accelerating innovation, the rules-based framework also protects the rights and interests of investors.The 6c -11 rule abolished the case-by-case exemption system and replaced it with transparent and standardized requirements, which triggered a wave of issuance of stock ETFs.Cryptocurrency ETFs are in the same situation now.By adopting a similar rapid approval process and based on objective standards, the SEC can manage an increasing backlog of applications, provide clear guidance for issuers and expand regulatory access to digital assets.

Lack of regulation in cryptocurrency ETFs has not curbed investment demand.Instead, it prompted capital to turn to alternative products such as digital asset treasury companies, private trusts and structural products.These tools have surged as alternatives to ETFs, but they usually charge higher fees, have less transparency and have weaker investor protection.The rapid growth of digital asset treasury companies (see Galaxy Digital’sThe rise of digital asset treasury companies) shows the scale of unmet demand and the risk of forcing investors to enter less regulatory channels.A transparent, rules-based ETF framework will help migrate such activities into a safer, more efficient, and more regulated structure.

Regardless of the final criteria, they should act more as filters for edge or scarce tokens to be traded, rather than barriers to mature assets that are delayed simply because of permission issues of the SEC.This means that the next wave of ETF approvals will focus on projects with high market capitalization, strong liquidity and meet undefined quantitative standards.This is likely to cover all assets that have met at least one of the three criteria currently proposed by the Chicago Options Exchange, the Nasdaq and the New York Stock Exchange.