The ETF Innovation Black Hole
June 25, 2024·0 comments·In Brief
The infrastructure that packaged financial innovation for three decades has stopped moving. Regulatory caution has calcified into something harder: the active prevention of anything genuinely novel. Even the 2024 crypto ETF boom, celebrated as a breakthrough, was really just the domestication of a revolutionary technology into something trackable, taxable, and entirely safe for institutions to sell.
• The share-class loophole never actually opened. Vanguard's patent expired, the industry filed to create new share classes, and the SEC has essentially frozen approval by finding "reasonable concerns" about investor harm that are difficult to disprove.
• What looks like innovation on the surface is regulatory theater. Crypto ETFs launched with massive fanfare, but they're the neutered version of what blockchain technology promised. The revolutionary potential got stripped away.
• Revenue extraction is replacing product innovation. Fidelity's fee structures forced ETF issuers into revenue-sharing agreements rather than building new investment solutions. The industry shifted from innovation to extraction.
• Congress isn't equipped to move this forward. Real structural change would require legislative action on tax treatment, smart contracts, and tokenization. But the political machinery for that kind of technical work barely functions anymore.
• The window for genuine innovation may have permanently closed. The SEC's approach isn't slowing down incremental improvements. It's preventing the foundational changes that would let finance actually evolve into its next form.
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