The ETF Grandfather

July 8, 2026

Most of the commentary on CLARITY during the legislative cycle has focused, predictably, on the high-visibility provisions: the §4B disclosure regime, the §104 coordinated-control test, the §301 DeFi line, the §401 bank-permissibility framework, the §602 NFT safe harbor. Those are the provisions where the doctrinal disputes have been most intense and where the heaviest post-enactment work will sit. Buried within §105, however, sits a provision that received almost no commentary during the legislative cycle and that creates one of the most consequential regulatory-arbitrage incentives in the entire bill. §105(b)(2) confers automatic non-ancillary-asset and non-security status on any digital asset that, on January 1, 2026, was the principal asset of an exchange-traded product not registered under the Investment Company Act and listed and traded on a national securities exchange. The provision is short. It is unconditional. And it would produce, by force of statute, a two-track regulatory regime that splits the digital-asset universe into grandfathered tokens (no §4B disclosure obligation, no §105 maturity-test analysis, automatic non-security status) and non-grandfathered tokens (subject to the full §4B/§104/§105 framework).

§105(b)(2) is short enough to quote in full. “A network token shall not be considered to be an ancillary asset, and, for the avoidance of doubt, shall not be considered to be a security under any provision of law described in subsection (b)(2) of section 4B of the Securities Act of 1933, as added by this Act, if, on January 1, 2026, any units of that network token were the principal asset of an exchange-traded product (A) not registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.); and (B) the shares of which are listed and traded on a national securities exchange registered under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f).”

Three operative elements:

  • First, the cut-off date is January 1, 2026. Tokens that were the principal asset of a qualifying ETP on or before that date are grandfathered. Tokens that achieved that status later (or that have not achieved it at all) are not.
  • Second, the qualifying ETP must satisfy two conditions: (A) not registered under the Investment Company Act of 1940, and (B) listed and traded on a national securities exchange registered under §6 of the Securities Exchange Act of 1934. The (A) condition is structurally important because it captures the spot-commodity ETP structure (the kind of structure under which the spot Bitcoin ETFs were approved by the SEC in January 2024 and the spot Ether ETFs in May 2024), as distinguished from registered investment companies under §3(a)(1)(C) of the ICA. The (B) condition is the national-exchange requirement, which limits the grandfather to ETPs trading on the NYSE, Nasdaq, Cboe, IEX, or another §6-registered national exchange.
  • Third, the consequence is automatic non-security treatment. The grandfathered token is “not considered to be an ancillary asset” and is “not considered to be a security” under the suite of statutes enumerated in §4B(b)(2). The structural effect is that the §4B disclosure regime does not attach, the §105 maturity-test rulemaking does not apply, and the token operates as a network token without the disqualifying-financial-rights analysis or the coordinated-control analysis that would otherwise determine its status.

What Gets Grandfathered

The universe of tokens that fit within §105(b)(2)’s grandfather is a function of which spot-commodity ETPs were listed and trading as of January 1, 2026. The SEC’s approval of spot Bitcoin ETPs, Securities Exchange Act Release No. 99306 (January 10, 2024), produced eleven approved spot Bitcoin ETPs, including the iShares Bitcoin Trust (IBIT), the Fidelity Wise Origin Bitcoin Trust (FBTC), the Grayscale Bitcoin Trust (GBTC), and others. The SEC’s approval of spot Ether ETPs, Release No. 100224 (May 23, 2024), produced eight or so approved spot Ether ETPs, including the iShares Ethereum Trust and the Fidelity Ethereum Fund.

The SEC’s approval of additional spot commodity ETPs in the period between May 2024 and January 1, 2026 is the principal variable. Some additional spot-commodity ETPs were approved during this window. The structural question is which tokens those approvals covered. Solana ETPs, XRP ETPs, and Litecoin ETPs were all in various stages of the SEC approval process during late 2024 and 2025. The market expectation was that several would be approved before the January 1, 2026 cutoff. The status of those approvals as of the cutoff date determines which additional tokens are grandfathered.

The exact list of grandfathered tokens is a function of SEC approvals and ETP launch dates, both of which are public information but which are not collected and presented as a single list. The precise mapping of which tokens were the principal asset of a §6-listed, non-ICA-registered ETP as of January 1, 2026 has to be assembled by hand. The current best estimate, based on the trajectory of approvals through 2025, is that Bitcoin, Ether, Solana, XRP, and Litecoin are highly likely to be grandfathered, with several other tokens possibly grandfathered depending on the precise status of pending approvals at the cutoff date.

The joint SEC-CFTC interpretation effective March 23, 2026, Release Nos. 33-11412 and 34-105020, supplies an additional reference point. In identifying examples of “digital commodities” (crypto assets that are not themselves securities), the release names APT, AVAX, BTC, BCH, ADA, LINK, DOGE, ETH, HBAR, LTC, DOT, SHIB, SOL, XLM, XTZ, and XRP, plus ALGO and LBC in footnote 51. The release’s classification operates on the substantive Howey analysis (these crypto assets are not securities because their value derives from the programmatic functioning of a functional crypto system rather than from essential managerial efforts of others), independent of any ETP-listing status. The structural point: the joint release and §105(b)(2) reach overlapping but not identical universes by different routes. §105(b)(2) grandfathers tokens that achieved ETP-listing status by January 1, 2026; the joint release classifies tokens as digital commodities based on their characteristics, which produces a similar but separate non-security determination. A token that fits both pathways has belt-and-suspenders protection. A token that fits one but not the other (a token whose ETP application is still pending but that has the structural characteristics of a digital commodity, or a token that has an ETP listing but whose structural characteristics raise close questions) is positioned somewhat differently in each regime. Map both lists.

The Asymmetry the Grandfather Creates

The structural significance of §105(b)(2) is not the protection it provides to the grandfathered tokens. Those tokens were, in all likelihood, going to clear the §4B and §105 maturity tests in any event, given that they have the operational characteristics (decentralization, public protocols, broad distribution, autonomous-state operation) that the maturity tests measure. The structural significance is the asymmetry the grandfather creates between grandfathered tokens and non-grandfathered tokens.

A grandfathered token is automatically a non-security under the §4B framework. The originator (to the extent there still is one) has no §4B disclosure obligation. The §104 coordinated-control test does not apply. The §105 maturity rulemaking does not apply. The token operates with the full benefits of network-token status from day one of CLARITY’s effective date.

A non-grandfathered token is subject to the full §4B/§104/§105 framework. The originator (assuming the token is an ancillary asset) has §4B disclosure obligations. The §104 coordinated-control test applies. The §105 maturity rulemaking applies. The token must clear the disqualifying-financial-rights screen in §4B(a)(7)(B), the maturity tests in §105(a), and (for ancillary assets) the §4B(d)(3) certification process to reach the same regulatory posture as the grandfathered token.

The asymmetry is meaningful because the §4B and §105 frameworks impose real compliance costs and real legal uncertainty during the rulemaking period. An originator deciding whether to launch a new token in 2026 or 2027 faces the prospect of a multi-year period during which the operational scope of network-token status is being defined through SEC rulemaking and inter-agency coordination. A grandfathered token sidesteps that period entirely. The market-cap effect of grandfathering is direct: tokens that don’t have to clear the maturity tests would trade at a premium relative to economically equivalent tokens that do.

The Rush Incentive

The structural consequence is the rush incentive §105(b)(2) creates for token issuers and ETP sponsors. A token that achieves principal-asset status in a §6-listed, non-ICA-registered ETP before January 1, 2026 is grandfathered. A token that misses the cutoff by even a day is not.

The pre-cutoff ETP-approval calendar was therefore the operational locus of substantial strategic activity. ETP sponsors with applications pending for new spot commodity ETPs had incentive to push for approval before the cutoff. Token issuers had incentive to work with ETP sponsors to accelerate the approval process. The SEC, for its part, faced incentive pressure to approve or deny pending applications before the cutoff, because applications resolved one way or the other before January 1, 2026 would produce final regulatory clarity, while applications still pending on the cutoff date would produce additional uncertainty.

The rush incentive is, in some sense, the legislatively-intended consequence of the grandfather provision. The drafters of §105(b)(2) presumably anticipated that the cutoff date would accelerate ETP approvals and produce a defined universe of grandfathered tokens. The structural choice is to create an incentive for pre-cutoff approval, with the understanding that the resulting universe of grandfathered tokens would be a relatively curated set of mature, well-distributed digital assets that had cleared the SEC’s pre-existing ETP-approval framework.

The structural critique is that the grandfather operates on a regulatory mechanism (the SEC’s pre-CLARITY ETP-approval process) that was itself contested. Grayscale Investments LLC v. SEC, 82 F.4th 1239 (D.C. Cir. 2023), forced the SEC to approve spot Bitcoin ETPs after the Commission had spent years denying applications. The May 2024 approval of spot Ether ETPs followed after similar litigation pressure. The structural process by which the SEC determined that Bitcoin and Ether could be the principal asset of a spot commodity ETP was not a substantive analysis of the tokens’ regulatory characteristics. It was a procedural analysis of whether the underlying spot markets were sufficiently resistant to manipulation to support an ETP listing. The same tokens that the SEC determined could be ETP principal assets would be grandfathered by §105(b)(2) into automatic non-security status, on the strength of a procedural determination that did not address the §4B(a)(7)(B) disqualifying-financial-rights analysis or the §104 coordinated-control test.

The policy logic is contestable. One reading is that the SEC’s procedural ETP-approval analysis is a reasonable proxy for substantive non-security status: a token whose underlying spot market is sufficiently mature for ETP-listing purposes is, presumably, a token that satisfies the substantive characteristics of decentralization, broad distribution, and autonomous operation. Another reading is that the procedural analysis does no such work and that grandfathering tokens on the basis of ETP-listing status is an arbitrary distinction that produces large differences in regulatory treatment for substantively similar tokens.

What §105(b)(2) Does Not Do

The scope of §105(b)(2) needs two clarifications.

  • First, the grandfather is on non-security status, not on registration or trading status. A grandfathered token does not automatically become tradeable on every market or eligible for every regulatory benefit. It simply receives statutory non-security status under the §4B(b)(2) suite of statutes. The token still needs to satisfy any other regulatory requirements that apply (CFTC oversight, BSA compliance for intermediaries, state-law requirements, and so on). The grandfather is a §4B/§105 question, not a comprehensive deregulation.
  • Second, the grandfather is on the token itself, not on the originator. A grandfathered token’s originator may still have §4B(c)(3) transition disclosure obligations if those obligations apply to pre-effective-date activity (Bitcoin and Ether, for example, have no real originator in the §4B(a)(4) sense and so the transition disclosure issue is largely moot). A grandfathered token’s originator may still face anti-fraud liability under §4B(h) and §10(b). The grandfather operates on the substantive registration question, not on the anti-fraud or transition-disclosure questions.

§105(b)(1) and the Prior-Judgment Provision

§105(b)(1) is the analog provision for prior court judgments. If, before the date of enactment of CLARITY, a court of the United States, in a non-appealable final judgment, found that a digital-asset transaction was not an offer, sale, or distribution of a security, a digital asset transferred pursuant to that offer, sale, or distribution is not a security under the §4B(b)(2) suite of statutes.

The §105(b)(1) provision preserves the results of prior favorable court determinations. The SEC v. Ripple Labs institutional-sales-versus-programmatic-sales distinction operates against the §105(b)(1) framework: programmatic sales of XRP through exchanges were found not to be securities transactions in the Ripple judgment, and the §105(b)(1) framework preserves that result for the tokens transferred in those transactions.

The interaction between §105(b)(1) and §105(b)(2) is operationally significant. A token whose status was favorably determined by a prior court judgment (§105(b)(1)) and that is also the principal asset of a qualifying ETP (§105(b)(2)) has two independent grounds for non-security status under §4B. A token that fails one but satisfies the other still has non-security status. The structural choice is to provide multiple independent paths to grandfathered status, with the practical effect that the major mature digital assets (Bitcoin, Ether, XRP, possibly others) have multiple structural protections against §4B treatment.

The Comment-Letter Implications for §105(a) Rulemaking

§105(b)(2) also shapes the §105(a) rulemaking. §105(a) directs the SEC to adopt rules within one year of enactment specifying when a network token is not considered to provide a disqualifying right under §4B(a)(7)(B). The §105(a) rulemaking is the principal operational mechanism for determining the network-token status of non-grandfathered tokens.

The structural posture for the §105(a) rulemaking is shaped by §105(b)(2). The grandfathered tokens (Bitcoin, Ether, etc.) take their non-security status straight from §105(b)(2); the rulemaking does not affect them. The non-grandfathered tokens are the principal subject of the rulemaking. The Commission’s interpretive choices on the §105(a) value-from-network rule will determine whether non-grandfathered tokens face a structurally similar or structurally more onerous regulatory pathway compared to grandfathered tokens.

The comment-letter strategy for non-grandfathered token issuers is to press for a permissive §105(a) rulemaking that approximates the §105(b)(2) grandfather’s automatic-non-security treatment. The argument is that the §105(b)(2) grandfather should not function as a competitive advantage for early ETP-listed tokens but rather as a procedural shortcut for a result that all qualifying network tokens should achieve under the substantive §105(a) test.

The comment-letter strategy for the banking lobby and other parties opposed to permissive network-token treatment is to press for a restrictive §105(a) rulemaking that requires substantive demonstration of the maturity characteristics that §105(b)(2) takes for granted in the grandfathered tokens. The argument is that ETP-listing status is a reasonable proxy for the substantive characteristics, and that non-grandfathered tokens should be required to demonstrate those characteristics affirmatively rather than benefit from any automatic carryover from the grandfather framework.

The Strategic Posture for ETP Sponsors

For ETP sponsors not currently active in the spot-commodity ETP market, §105(b)(2) is a strategic forcing function. The pre-cutoff window (mid-2025 through January 1, 2026) was the principal opportunity to achieve grandfathered status for additional tokens. Post-cutoff, achieving network-token status for a new token requires running the §4B and §105 framework, with the corresponding compliance costs and uncertainty.

The post-cutoff strategic posture for ETP sponsors is to focus on the additional tokens that the SEC’s rulemaking will, in due course, recognize as network tokens. The §501 sandbox framework (covered in Post #18 of this series) provides one structural pathway for innovative product structures. The §4B(b)(5) prior-certification mechanism provides another. The §4B(d)(3) ongoing-certification mechanism provides the operational exit. ETP sponsors who time their applications to coincide with the maturity of the rulemaking framework will be positioned to bring additional spot commodity ETPs to market as the rulemaking clears.

Working the Grandfather

Four consequences follow.

  • First, identify the grandfathered universe precisely. The list of tokens that satisfied §105(b)(2) on January 1, 2026 is the operationally significant question. Counsel should develop a precise mapping of which tokens were the principal asset of a §6-listed, non-ICA-registered ETP as of the cutoff date. The mapping should include the precise ETP listing date, the precise SEC approval order, and the precise national-exchange status.
  • Second, understand the asymmetry. Grandfathered tokens have automatic non-security status under §4B. Non-grandfathered tokens have to run the §4B and §105 framework. The asymmetry is meaningful in compliance costs, legal risk, and market access. Clients holding or trading grandfathered tokens face a different regulatory posture than clients holding or trading non-grandfathered tokens.
  • Third, engage in the §105(a) rulemaking. The comment-letter process will shape the operational scope of network-token status for non-grandfathered tokens. Engage aggressively, and attend to the procedural and substantive arguments that bear on the rulemaking’s calibration.
  • Fourth, monitor the §4B(b)(5) prior-certification process. The certification process is the principal pathway for non-grandfathered tokens to achieve network-token status under the new framework. The procedural mechanics, the standards for Commission objection, and the timing of certifications will determine the operational pace at which the non-grandfathered universe of tokens migrates into network-token status.

The §105(b)(2) ETP grandfather is one of the most consequential drafting choices in CLARITY. It establishes a two-track regulatory regime that splits the digital-asset universe based on a procedural mechanism (ETP listing status) that does not, on its face, capture the substantive characteristics the network-token framework is designed to measure. The structural critique is real, but the practical reality is that the grandfather sits in the engrossed text and nothing in the endgame politics suggests it comes out. The job is to understand the grandfather precisely, identify the grandfathered universe, and structure transactions to take advantage of (or to navigate around) the asymmetry it creates.

Written by David Lopez Kurtz