Bobby Boucher
The Securities and Exchange Commission (SEC) is edging closer to approving a highly anticipated ‘spot’ Ethereum exchange-traded fund (ETF), potentially as soon as this week.
Ethereum Regulatory Shifts and Influences
Sources close to the Commission indicate that the SEC and its Chairman, Gary Gensler, are considering recent court rulings and previous guidance on Ethereum futures ETFs. This has led to increased optimism that nine issuers may soon be granted permission to offer products tracking the daily price of the world’s second-largest cryptocurrency.
While the approval is not yet certain, SEC staff have shown signs of warming up to the idea. This approval could come as early as Thursday, which marks the deadline for the agency to decide on the so-called 19b-4 applications. These applications, filed by the CBOE exchange, request the listing of Ethereum spot ETFs from VanEck and Ark Investments in partnership with 21Shares.
The Approval Process
Approving the 19b-4 applications is only the first step in a two-part process. The SEC would also need to approve the issuers’ registration statements, known as S-1s. This part of the process could take several weeks, potentially delaying the official launch of the ETFs until later this year.
An SEC approval would mark another significant development in the maturation of the $2 trillion crypto industry. Many had lost hope that the SEC would approve an Ethereum spot ETF due to the agency’s lack of engagement with applications and the ambiguity surrounding Ethereum’s status as a potential security.
Recent Developments
However, on Monday, the SEC began actively engaging with issuers and national exchanges ahead of Thursday’s deadline, mirroring its approach before approving eleven Bitcoin ETFs in January.
The SEC, through a spokesperson, declined to comment.
Prospective ETF issuers, speaking on condition of anonymity, expressed surprise at the apparent change of heart by the agency. Many in the industry attribute this sudden engagement to increasing bipartisan support for digital assets from Congress and former President Trump. Trump has stated he would embrace crypto and end the Biden Administration’s regulatory “hostility” towards the industry if elected. On Tuesday, the Trump campaign updated its website to accept cryptocurrency donations.
Influential Factors and Legal Precedents
Sources familiar with Gensler’s thinking suggest he is also considering other factors, such as the court ruling involving crypto asset manager Grayscale and the SEC’s prior approval of Ethereum futures ETFs, which launched in October.
Last summer, a federal appeals court rejected the SEC’s decision to deny Grayscale’s petition to convert its GBTC Bitcoin Trust into a spot ETF. The court argued that the agency failed to make a convincing case that a Bitcoin spot ETF was materially different from the futures ETF, which had been trading since 2021. This ruling laid the groundwork for the Bitcoin spot ETFs’ rollout and now potentially for Ethereum spot ETFs as well.
Key Considerations for Approval
According to documents filed today by issuers, the SEC’s main concern in approving an Ethereum spot ETF is “staking.” Staking allows investors to earn passive income by using their Ethereum as collateral. In an ETF format, this could provide investors with higher returns compared to an ETF that only tracks Ethereum’s daily price.
It’s staking by which the SEC believes it may have a case that “Ethereum 2.0”, or Ethereum issued since the blockchain’s merge to a so-called “proof-of-stake” consensus mechanism in 2022, may qualify as a security.
If the SEC approves the Ethereum ETFs without the staking component, it does not negate the possibility that Ethereum issued on the proof-of-stake network could be considered a security. Reports from April indicated that the SEC’s Enforcement Division has been investigating Ethereum, its merge, and associated entities for over a year.
Democrats vs Republicans
Despite the SEC’s stance that external political factors do not influence its decisions, the issue of crypto regulation has become increasingly political. The Biden Administration, including Senate Democrats like Majority Leader Chuck Schumer (D-New York), are concerned that Republicans and GOP presidential candidate Donald Trump could leverage the growing popularity of digital assets to gain voter support.
Last week, Schumer led a group of twelve Democrats to vote to repeal a controversial SEC rule that would limit crypto companies’ access to the banking system. The 60-38 vote to repeal was seen as a breakthrough moment for the industry, which had struggled with the Democratic party’s support for Gensler’s regulatory crackdown on crypto.
Upcoming Legislation
On Wednesday, the House is scheduled to vote on a groundbreaking bill that would establish a comprehensive regulatory framework for digital assets. This legislation aims to provide clarity for crypto companies and investors.
As the SEC moves closer to a decision, the outcome could have far-reaching implications for the crypto industry and its regulatory environment. The anticipation surrounding the potential approval of Ethereum spot ETFs underscores the dynamic and evolving nature of cryptocurrency regulation in the United States.
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