SEC Interest in Ethereum ETFs Came from Nowhere, Or Did It?

• The SEC has maintained radio silence over Ethereum ETFs for over half a year. 
• As the odds for approval appeared increasingly bleak, the SEC broke its silence and approved the proposals. 
• What convinced the SEC to approve ETH ETFs out of nowhere?

Earlier this year, the hype surrounding Bitcoin ETFs sparked hope that Ethereum and other altcoins might follow suit, prompting asset managers to race to file their proposals. However, unlike its predecessor, the path for an ETH ETF has been far from clear, with the SEC keeping the market guessing .

For months, issuers navigated through the dark, tweaking proposals and awaiting feedback, only to face further delays and radio silence from the SEC. However, as optimism waned, the SEC suddenly broke its silence, requesting updated 19b-4 forms and approving the proposals. 

So, what prompted the commission’s shift in communication?

What Made the SEC Approve Ethereum ETFs? 

The SEC has remained tight-lipped on ETH ETFs for quite some time now, considering issuers first applied in September 2023. For over half a year, the commission has continuously delayed any decision. 

Experts who predicted high odds for approval earlier this year were left deflated. Their hopes were dashed following rumors about the SEC’s investigation into Ethereum potentially being classified as a security. The fate of a spot Ether ETF seemed increasingly bleak, causing both the odds for approval and the market to nosedive as they braced for outright rejections.

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Still, despite this cloud of uncertainty, issuers soldiered on and experimented with their proposals. Some tweaked fees, others clarified custody of investor funds, but nothing seemed to catch the SEC’s attention—until Ark 21Shares rolled the dice on its proposal. 

On May 10, Ark Invest and 21Shares took a Hail Mary pass, cutting staking out of their latest spot Ether ETF proposal . They removed the clause about staking a portion of the fund’s assets through third-party providers, hoping to provoke a response from the SEC. Inspired by Ark 21Shares’ initiative, other issuers like Fidelity quickly followed suit, removing staking from their proposals.

Lo and behold, weeks later, the SEC finally broke its silence, asking for amended 19b-4 forms and approving Ethereum ETFs. Was removing staking the magic key?

The SEC is Not a Fan of Staking

Over the past two years, the SEC has been a vocal critic of staking , as evidenced by its string of enforcement actions against staking products. Its primary argument hinges on the notion that crypto staking services are essentially investment contracts , where investors commit their assets in exchange for potential returns facilitated by the efforts of others, in this case, the validators on the network. 

From clamping down on Coinbase’s staking offerings to issuing multi-million dollar fines to Kraken over its staking products, the SEC has been skeptical of the allure of staking. It harbors concerns about users transferring ownership of their tokens to third parties like exchanges or networks, a provision prevalent in all Ethereum ETF proposals. 

Many spot ether ETF issuers have proposed using investors’ funds to stake through third-party providers, a practice the SEC views as crossing the line and potentially opening a Pandora’s box of complications.

Interestingly, the SEC is not the only one that frowns upon staking; Ethereum founder Vitalik Buterin and ETH devs have also expressed reservations about its implications.

Ethereum Founder and Devs Also Not a Fan of Staking

“When you make sausage, you know how it’s made,” Justin Drake, an Ethereum Developer, asserted , explaining why he refrains from staking much of his ether. His statement implied that a deeper understanding could reveal less appealing aspects of the network’s staking mechanism. 

Ethereum founder Vitalik Buterin echoed Drake’s sentiment , sharing that he opts to steer clear of staking ether, citing security concerns and the potential for conflicts of interest.

"Probably the biggest reason why I personally am not like just staking all of my ETH instead like staking a fairly small portion is because if you stake your ETH, it has to be like the key is that access it has to be public on some system that's online. And like for safety, it has to be a multisig, and multisigs for staking are still fairly difficult to set up. And, you know, it just gets complicated about in a bunch of ways," Buterin asserted.

With Ethereum natives not fully entrusting their assets to the staking mechanism, it’s evident why the SEC was wary of exposing investor funds to such risks. However, the recent amendments to the ETH ETF proposal paint an alarming picture for the industry.

Should Other Staking Tokens Be Concerned? 

A majority of crypto projects have transitioned from the energy-intensive proof-of-work consensus mechanism to the more sustainable proof-of-stake. Staking has become ubiquitous , embedded in the ethos of many networks, and serves as a key mechanism.

However, with ETH ETF proposals gaining approval without staking, the entire ecosystem is poised for disruption, posing a threat to tokens that rely on the PoS model. This might compel projects to reconsider their approach, either by abandoning staking or by attracting institutional interest.

While the future of staking remains uncertain, a shift looms on the horizon. Now that we’ve examined staking, there’s another consideration:  Maybe it wasn’t staking at all.

Was the SEC Just Waiting on ETH ETFs? 

Under Gary Gensler’s leadership, the SEC likes to wait its full 240-day waiting period before reaching a final decision, a practice evident in their approach to Bitcoin ETFs. For most issuers, this window was set to close on May 23. 

It seems plausible that the SEC has deliberately postponed comments or decisions concerning Ethereum ETFs, possibly waiting until the eleventh hour.

However, the likelihood of the SEC procrastinating until the last moment seems slim, especially considering its prolonged silence compared to its consistent engagement with issuers on Bitcoin ETF revisions .

Alternatively, political pressure may be influencing the agency’s actions. 

SEC Under Political Pressure For Silence on ETH ETFs?

The US crypto industry has been locked in a multi-year intense battle with the Biden administration , trying to navigate the nation’s murky and tangled web of legislation and regulators’ alleged campaign against digital assets.

Now, lawmakers are stepping up to challenge regulatory actions, particularly those of the SEC, which has created a hostile environment for the US crypto market, prompting talent and companies to seek opportunities elsewhere.

This month, the US House of Representatives passed several groundbreaking crypto resolutions. On May 9, it passed a resolution overturning the SEC’s crypto accounting guidance , which stopped banks from serving crypto customers. Then, on May 22, the House approved the FIT21 act , aiming to transfer regulatory oversight of cryptocurrencies from the SEC to the CFTC—a pivotal moment for the industry.

With mounting pressure from US lawmakers and scrutiny over its approach, the SEC is easing its stance, possibly in response to the growing chorus of dissent.

On the Flipside

• Thanks to the hype surrounding spot ether ETFs, Ethereum made history by surpassing Mastercard by market capitalization.
• ETH ETFs could hit the market much later after the approval of 19b-4 forms. 

Why This Matters

The current SEC leadership is notorious for its ambiguity and lack of clear regulatory guidelines, particularly concerning the crypto industry. The path to approving ETH ETFs has been rocky and characterized by uncertainty and a lack of transparency, as evidenced by the uncertainty surrounding why the commission approved the investment vehicle after allegedly threatening to probe it.

US Congress makes history with FIT21:
FIT21 Crypto Bill Sweeps Through US House in Historic Vote President Biden is eager to work on FIT21 with Congress:
Biden “Eager to Work” on Crypto Bill Despite Reservations