Share this article
Spot Ethereum ETF has finally received approval after a period of uncertainty. Thursday’s approval was not only a milestone for Ethereum, but also signaled a positive development in the U.S. regulatory approach to cryptocurrencies. This article will provide more insight into recent approvals, potential motivations, and their impact on the industry.
Spot Ethereum ETF Approval Overview
On May 23, the U.S. Securities and Exchange Commission (SEC) approved Form 19b-4s related to eight spot Ethereum ETFs. These include Blackrock’s iShares Ethereum Trust, VanEck Ethereum Trust, Fidelity Ethereum Fund, ARK 21Shares Ethereum ETF, Franklin Ethereum ETF, Bitwise Ethereum ETF, Grayscale Ethereum Trust, and Invesco Galaxy Ethereum ETF.
This approval follows the launch of a spot Bitcoin ETF in the United States in January. However, unlike Bitcoin ETFs, Ethereum products still require S-1 Form approval to become fully operational, a review of which is currently pending.
As Crypto Briefing reported, securities watchdogs recently began working with ETF issuers on S-1 forms. This development also confirmed some previous speculation that the SEC had lacked interaction with issuers during its review process.
Taking previous cases into account, Bloomberg ETF analyst James Seyffart estimates that it could take up to five months for the SEC to clear Ethereum funds for trading. But he analysts suggest the timeline could be extended.
Key factors affecting approval
According to the SEC’s approval document, the correlation between Ethereum futures and spot markets was one of the key factors influencing the decision.
In particular, the SEC conducted its own analysis to confirm Bitwise’s amendments and the correlation results provided by other commentators, including Coinbase Letter and CF Benchmarks Letters. The SEC’s findings confirmed the reported high correlation between CME Ethereum futures and spot Ethereum markets, indicating a strong link.
Other considerations addressed in the approval document include investor protection, market integrity, volatility and risk concerns.
But Jake Chervinsky, Variant’s chief legal officer, argued that the SEC could “explicitly avoid staking” in the document.
There has been ongoing discussion surrounding the SEC’s position on Ethereum’s staking feature. Analysts believe that removing the staking component or confirming that there is no staking in the Ethereum ETF filings is as important as other key factors influencing the decision.
Major companies such as Fidelity and ARK 21Shares initially included staking provisions in their filings with the SEC. However, ahead of the SEC’s decision deadline, these companies amended their filings to remove any mention of staking.
There was no further comment from the ETF issuer, but this removal is likely in response to the SEC’s position that staking services may be considered unregistered securities offerings.
Historically, the SEC has taken a cautious approach to staking services.
For example, the SEC alleged that Kraken’s staking program, which allows users to deposit cryptocurrency assets and receive rewards, is an unregistered securities offering that violates U.S. securities laws. The lawsuit ended with Kraken reaching a $30 million settlement with the SEC. The company has since discontinued staking services for U.S. retail customers.
Another example is the SEC’s lawsuit against Coinbase in June 2023. The agency also claimed that Coinbase’s retail staking service was a security.
Why is Ethereum ETF approval important?
The SEC’s approval of a spot Ethereum ETF suggests, but does not definitively confirm, its position on the underlying asset, Ethereum (ETH).
There have been rumors that the SEC considers most cryptocurrencies except Bitcoin to be unregistered securities. This is consistent with statements by SEC Chairman Gary Gensler. But the recent ETF approval offers a potential counterpoint.
Paul Grewal, Chief Legal Officer of Coinbase, and Jake Chervinsky, Chief Legal Officer of Variant, interpret the recent approval as a tacit agreement to ETH’s commodity status, given that ETF shares are commodity-based.
“This week, today has been a roller coaster unlike any day I have ever seen. ETH is effectively considered a commodity, as we have always known,” Grewal said.
“… It’s clear. “Commodity-based trust stocks,” Chervinsky noted.
Why isn’t delegated authority important?
Approval of the spot Ethereum ETF was issued through a delegated authority, which eliminates the need for a public member vote. This arrangement raises concerns because it allows all commissioners the technical right to challenge decisions and request review.
But Bloomberg ETF analyst James Seyffart said the review request was unlikely to change the outcome.
According to him, SEC commissioners will not allow the Department of Trading and Markets to issue such approval unless a majority supports the decision. This agreement among members suggests a strong basic consensus for approval.
I say, “I wouldn’t change anything.” Because the SEC Commissioners would not have permitted the Department of Trading and Markets to draft/issue this Authorization Order through delegated authority unless a majority of Commissioners agreed with the decision.
— James Seyff (@JSeyff) May 23, 2024
In essence, the approval of a spot Ethereum ETF under delegated authority indicates that the launch of such an ETF is imminent.
Possible enforcement action against Ethereum-related entities
The recent approval of a spot Ethereum ETF came as quite a surprise, especially considering the SEC’s alleged legal threats against Ethereum-related entities such as the Ethereum Foundation and Consensys.
The agency has reportedly launched a campaign to classify Ethereum (ETH) as a security. Many believed that this move would weaken the prospects for approval of an Ethereum-based ETF.
This backdrop, combined with the lack of participation reported by insiders and the generally pessimistic outlook from ETF issuers and experts, made the favorable decision on May 23 particularly unexpected.
Experts speculated that the SEC was reluctant to approve an ETF involving ETH in order to classify the cryptocurrency as a security. However, the prevailing political environment in the US appears to have influenced the SEC to change its stance and approve these ETFs.
Nevertheless, this approval does not mean that the relevant authorities have completely relieved themselves of responsibility. The SEC may still treat the sale of ETH tokens during Ethereum’s 2014 ICO as an “investment contract.”
If so, it likely reflects the Ripple-SEC legal action, in which the SEC claimed that XRP sales between 2013 and 2020 constituted “investment contracts.”
A court ruling last year found that XRP sales on the secondary market do not constitute ‘investment contracts’, but institutional sales are considered unregistered offers and sales of investment contracts under the Howey test.
Beyond these possibilities, in a less likely scenario, the SEC may not intend to sue the company.
Recent legal threats, including those targeting Uniswap, may be a tactic to intimidate or put pressure on cryptocurrency companies rather than a true reflection on wrongdoing. This view was previously supported by Chervinsky.
The SEC just sent a Wells notice to Robinhood.
The numbers they have sent regarding cryptocurrencies in recent months are astounding. It is difficult to imagine that so many enforcement actions would (or could) be taken at once.
It seems they are now abusing the Wells process as a scare tactic.
— Jake Chervinsky (@jchervinsky) May 6, 2024
Share this article