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    ETF Approval Impasse: Shutdown Stalls Crypto Regulation

    TLDR; Government Impasse Stalls Crypto Progress

    • Washington deadlock persists into its sixth day, hindering federal operations.
    • SEC operations significantly hampered; key decisions on crypto ETFs and regulatory exceptions are on hold.
    • CFTC functioning with limitations, led by a single acting commissioner.
    • Prediction markets suggest a protracted shutdown, potentially exceeding two weeks, maybe a month.
    • With SEC gridlocked, regulatory attention turns to agencies like the Federal Reserve for crypto oversight.

    The ongoing US government shutdown, initiated on September 30, is causing disruptions across various federal bodies, most notably the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The failure of Congress to agree on a temporary funding extension has triggered employee furloughs and significantly reduced agency operations.

    The Senate has scheduled a vote on a short-term funding bill for Monday at 5:30 pm ET. However, at the time of this report, it’s uncertain if the resolution has enough support to pass.

    At the heart of the budget dispute lies a disagreement over healthcare policies. Democratic lawmakers are insisting that any funding legislation must reverse previous spending reductions enacted in a July budget agreement.

    The SEC has announced that it will continue to operate in a limited capacity, with a severely reduced staff presence. This operational constraint is expected to significantly delay the review process for pending crypto exchange-traded fund (ETF) applications, many of which were anticipated to receive near-term approvals.

    The CFTC is facing similar operational challenges. The agency is currently being led by only one commissioner serving in an acting chair capacity and is also struggling with limited staff resources.

    Crypto Industry Impact

    Analysts at TD Cowen’s Washington Research Group suggest that the shutdown has put a freeze on crypto policy advancements. The SEC had been actively considering regulatory exemptions for novel crypto offerings and companies involved in tokenized equity products.

    Jaret Seiberg from TD Cowen noted that the SEC’s work on crypto policy adjustments is effectively suspended until the federal government receives renewed funding. This delay extends beyond the immediate shutdown period, as agency personnel will require time to resume their projects and responsibilities after returning to work.

    The current situation also prevents the Senate from considering proposed legislation aimed at establishing a comprehensive regulatory framework for digital asset markets. Furthermore, the President is restricted from nominating candidates to fill vacant CFTC commissioner positions during the shutdown.

    The White House recently withdrew the nomination of Brian Quintenz for the role of CFTC chair. Reports indicate that this decision followed opposition from Cameron and Tyler Winklevoss, founders of the Gemini crypto exchange, who are also significant donors to the President.

    Przemysław Kral, CEO of the Zondacrypto exchange, suggests that the shutdown could negatively impact the crypto industry by disrupting the SEC and CFTC. He warns that their limited operational capacity could stifle innovation and erode investor confidence.

    Market Expectations and Regulatory Alternatives

    Betting and prediction platforms are reflecting widespread expectations of a prolonged shutdown. Data from Kalshi indicates users are assigning a 69% probability that the shutdown will extend beyond 15 days, and a 41% chance it will last longer than 25 days.

    Polymarket users have assigned a 24% probability that the current shutdown will become the longest in US history. The platform data suggests a 72% chance that the shutdown will conclude after October 15.

    The record for the longest government shutdown is currently held by President Trump, who oversaw a 35-day shutdown during his first term stemming from his demands for funding for a US-Mexico border wall.

    With the SEC effectively sidelined, TD Cowen predicts a shift in crypto policy focus to other regulatory bodies. The Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) are all capable of continuing operations during government shutdowns.

    These agencies are expected to address issues related to banks issuing stablecoins, providing custodial services for crypto assets, and developing payment systems leveraging tokenization technologies. The CFTC remains operational, albeit with limitations, despite operating with only an acting commissioner.

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