Spot ETH ETFs & A Rocky Road to Regulatory Acceptance

The Journey of Bitcoin ETFs

Bitcoin ETFs have been a topic of discussion for several years. In July 2023, several applications for spot Bitcoin ETFs were filed under a rule called 19b-4. This rule is part of the process used by the United States Securities and Exchange Commission (SEC) to review and approve new financial products. The SEC has 240 days to review these applications and make a final decision.

By January 2024, all the spot Bitcoin ETFs that had been filed in July were approved. This six-month approval period was relatively quick and signaled a significant step forward for cryptocurrency ETFs in the U.S. market. The approval of these Bitcoin ETFs was seen as a major milestone and provided a sense of optimism for similar products focused on other cryptocurrencies, such as Ether.

The Struggles of Spot Ether ETFs

In contrast, the process for getting spot Ether ETFs approved has been much more challenging. The first wave of spot Ether ETF applications was filed in September 2023, with additional applications following in October and November of the same year. The final group of applications was submitted in the first quarter of 2024. Despite this flurry of activity for the past eight months, as the final deadline for the first wave of applications approached in May 2024, there was still no indication from the SEC that approval was forthcoming.

Source: James Seyffart

 

Just two days before this crucial deadline, five potential Ether ETF issuers received last-minute feedback from the SEC and submitted amended 19b-4 filings. These issuers included prominent asset managers such as Fidelity, VanEck, Franklin Templeton, as well as joint applications from Galaxy and Invesco, and ARK Invest and 21Shares.

One major hurdle for Ether ETF applications has been the SEC's concerns about the provisions for ETH staking. Staking is a process where cryptocurrency holders can earn rewards by locking up their coins to help secure the network. This practice is common in the Ethereum network but poses regulatory challenges that the SEC is not willing to ignore without thorough consideration.

In their amended filings, Fidelity, Franklin Templeton, and ARK 21Shares decided to remove provisions for Ether staking from their applications. This move was likely an attempt to address the SEC's concerns and increase the chances of approval. However, even with these changes, the uncertainty around Ether ETFs remains high.

Why ETH ETFs Face More Approval Challenges Than BTC ETFs

There are several reasons why the approval process for spot ETH ETFs has been more challenging compared to spot BTC ETFs. These reasons stem from the differences between the two cryptocurrencies, their networks, and the regulatory landscape.

1. ETH Staking

One significant challenge specific to Ether ETFs is the issue of Ether staking. Staking involves locking up a certain amount of Ether to help maintain the network's security and operations, in return for earning rewards. This process is a fundamental part of Ethereum's proof-of-stake consensus mechanism, which differs from Bitcoin's proof-of-work system. The SEC has expressed concerns about staking, as it introduces additional regulatory and operational complexities. These concerns have led to issuers amending their applications to exclude staking provisions, attempting to address the SEC's reservations.

2. Complexity of the Ethereum Network

Ethereum operates on a more complex technology compared to Bitcoin. While Bitcoin functions primarily as a digital currency and a store of value, Ethereum is a decentralized platform that supports smart contracts and decentralized applications. This added complexity introduces more variables and potential risks that the SEC needs to consider.

Also, as the network transitioned from a proof-of-work consensus mechanism to a proof-of-stake mechanism, SEC has undertaken an investigation into whether ETH qualifies as a security. If ETH is classified as a security by the SEC, it could provide a reason for the regulator to reject spot ETH ETF applications. The potential classification of ETH as a security introduces additional layers of regulatory complexity and uncertainty, which further complicates the approval process for ETH-based financial products.

3. Regulatory Familiarity

Bitcoin has been around since 2009 and is the first and most widely recognized cryptocurrency. Over the years, regulators have become more familiar with Bitcoin, its risks, and its market dynamics. This familiarity has likely contributed to a quicker and more confident approval process for Bitcoin ETFs. In contrast, Ethereum, launched in 2015, is newer and operates differently, so regulators are less comfortable and more cautious in approving related financial products.

4. Market Manipulation Concerns

The SEC has historically been concerned about the potential for market manipulation in the cryptocurrency market. While these concerns apply to both Bitcoin and Ether, the more extensive use cases and trading venues for Ethereum might increase the perceived risk. Ethereum’s ecosystem includes various decentralized finance applications and tokens built on its network, which can introduce additional layers of market complexity and manipulation risks that the SEC needs to evaluate thoroughly.

Additionally, the creators of Bitcoin remain anonymous, known only by the pseudonym Satoshi Nakamoto. This anonymity might reduce concerns about direct influence from known individuals or entities. In contrast, Ethereum and ETH were created and are continuously developed by known individuals, including Vitalik Buterin and other key figures. This visibility and association with specific people might increase the SEC's concerns about potential manipulation or influence, as the actions of these known individuals could impact the market dynamics of ETH.

5. Timing and Scattered Applications

The timing and submission pattern of the ETF applications also play a role. The spot BTC ETF applications were mostly filed together in July 2023, allowing the SEC to review them in a consolidated manner. This streamlined process may have facilitated a quicker decision. On the other hand, the spot ETH ETF applications were scattered over several months, from September 2023 through early 2024. This submission pattern may have complicated the review process, contributing to delays and a prolonged period of uncertainty.

Furthermore, the SEC might be considering the strategy of extending approvals to multiple spot ETH ETF applications at the same time to avoid first-mover advantages and to ensure fairness. This approach was taken with spot BTC ETFs, where approvals were granted simultaneously to prevent any single entity from dominating the market early on. By coordinating the timing of approvals for spot ETH ETFs, the SEC aims to maintain a level playing field and promote a competitive market environment.

The Future of Spot ETH ETFs

Despite all the hurdles, the journey towards the approval of spot Ethereum ETFs has seen significant progress recently. VanEck's proposed spot ETH ETF was listed on the Depository Trust and Clearing Corporation's (DTCC) website, marking a crucial step in the preparation process. However, it's important to note that this listing doesn't imply full launch status but indicates readiness pending regulatory approval from the SEC.

Several prominent firms have weighed in on the potential approval of spot ETH ETFs and its impact on Ethereum's price trajectory. Coinbase has stated that spot ETH ETFs have a 30%-40% chance of approval by the end of the month. Bloomberg ETF analysts revised their odds for approval from 25% to 75%, citing chatter within the SEC indicating a more favorable stance. Standard Chartered believes that if the SEC approves ETH ETFs, both ETH and BTC prices will soar, with ETH potentially reaching $8,000 by year-end.

Amidst these developments and predictions, the price of ETH has surged past $3,800, reflecting investor optimism surrounding the potential approval of spot Ethereum ETFs. This increase represents a 22% jump in just 24 hours, fueled by rumors of imminent ETF launches.

Source: Bitget

 

Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.