The U.S. Securities and Exchange Commission (SEC) confirmed yesterday that it had approved a significant rule change that would allow Ethereum’s native token, ETH, to be held in exchange-traded funds, catching many off guard given that last week, nearly everyone from Bloomberg analysts to prediction markets thought it was a long shot.
Note: The views expressed in this column are those of the author and do not necessarily reflect the views of CoinDesk, Inc. or any of its owners or affiliates.
I have never understood why SEC Chairman Gary Gensler would withhold approval of these spot ETH products, given the SEC's embarrassment in its aggressive fight to list a Bitcoin ETF.
Remember that a three-judge panel of the Court of Appeals said the reasons the SEC rejected (and continued to reject and reject) the spot Bitcoin fund were “arbitrary and capricious” because the SEC had already approved a Bitcoin futures product that would essentially do the same thing. The same situation would apply to ETH, and some company would be happy to sue, just like Digital Currency Group did for a Bitcoin ETF.
The SEC's decision today seems just as arbitrary, just in the opposite direction. In an interview with CoinDesk's Jesse Hamilton hours before the approval was made public, Gensler said he would abide by “how the courts interpret the law,” adding that “the D.C. Circuit took a different view, and we've reversed course in light of that.”
So why now? What does this mean for the future of Ethereum? And does this bode well for other cryptocurrencies?
As many have already noted, there appears to have been a major shift in the cryptocurrency regulatory landscape. On Thursday, the House of Representatives made a historic vote to approve the most substantive crypto-specific bill to date. This came on the heels of both the House and Senate voting to repeal the SEC's controversial cryptocurrency custody accounting rules.
With the majority of Democrats joining both bills, the US government's long-running battle with cryptocurrencies seems to be nearing an end. Notably, President Biden announced that he will not veto the Cryptocurrency Market Structure Act, FIT21, which the White House officially opposes, which is a pretty big concession.
These events on Capitol Hill may have acted as a kind of temperature check, helping convince Gensler that his approach to crypto was becoming politically dangerous: after all, former President Donald Trump had just made a highly publicized announcement of his support for cryptocurrencies, and the SEC's rejection of an ETH ETF for not having “productive” meetings with the applicants would be a major ammunition.
To be sure, the SEC hasn’t immediately approved the actual listing of ETH ETFs — it only approved the 19b-4 proposals of Cboe, NYSE Arca and Nasdaq, and companies like Ark Invest, Bitwise, BlackRock, Fidelity and Grayscale can list these funds once their S-1 filings are approved, which could take several months.
First of all, the launch of the Spot ETH fund means that institutional interest in the second-largest cryptocurrency could soon grow significantly. Not only did the move act as a stamp of approval of sorts, it also creates a familiar on-ramp for anyone to buy into the asset, from retail investors looking to diversify their 401(k)s to hedge funds, much like ETFs have done for Bitcoin.
“The Ethereum ETF announcement came as a surprise to many. While the Bitcoin ETF created the roadmap for crypto ETFs for brokerages and large registered investment advisors, we still expect many institutional investors will be scrambling to explain the current state of Ethereum to their sales teams and get the appropriate infrastructure in place,” Framework Ventures co-founder Michael Anderson said in an email.
While ETFs are really just a way to gain exposure to the underlying assets, it's also possible that these funds could actually drive more users to Ethereum itself. One scenario: Since the SEC likely won't allow fund managers to stake the underlying ETH, new ETH investors may decide they want to stake themselves to get an extra yield of around 3.5%.
Valeant's Chief Legal Officer, Jake Cherbinski, said: As noted by X, the approval would answer a long-standing question of whether ETH is a security. Chervinsky noted that if these funds are allowed to trade, it would mean that unstaken ETH in particular would not be considered a security by authorities. That in itself could encourage market entry, given that currently many institutional investors are refraining from entering the market simply due to regulatory uncertainty.
On a more technical level, there are many open questions about what it means for Ethereum in a world where these funds buy as much ETH as the Bitcoin ETF (assuming they are as popular as the Bitcoin ETF). To some extent, the buying pressure will be huge for the network and the surrounding Layer 2.
Ethereum introduced a burn mechanism that destroys tokens after every transaction, which made the asset class deflationary for a long time. However, as alternative chains such as L2 and Solana have grown in popularity, Ethereum transaction volume has dropped significantly and ETH supply is growing again. This will have a long-term impact on the price and demand of the asset. An ETF could help support the economics of ETH.
Finally, it will be interesting to see how this fund impacts the staking economics. Some have raised alarms about the amount of ETH staked, as applications like Lido have made it easy to lock up even tiny amounts of cryptocurrency. These concerns may be heightened given the potential for the ETF to pull even more ETH out of circulation.
As mentioned above, the approval of the ETH ETF is an endorsement of sorts for Ethereum and is likely an opportunity for the chain to solidify its already dominant brand position.
“Assuming an Ethereum ETF sees even a fraction of the institutional inflows that the Bitcoin ETF has seen, I think there's a good chance that Ethereum will solidify its position as the undisputed leader among decentralized app platforms over the next few years, at least in terms of market share and valuation,” Anderson said.
However, the move could also open the door for alternative chains such as Cardano, Solana, and Ripple to further enter the world of high finance. Of course, Bitcoin and Ethereum have had an easier time (overall) as they were already accepted by financial giants such as CME. Ethereum futures have been up and running on CME for three years already, and it is not clear if other crypto assets are even being considered.
It is also worth noting that while the SEC has signaled that it considers ETH to be a security, it has also proactively stated that assets such as SOL, ADA, and ALGO meet the definition of the Howey test, which is used to determine whether something is an investment contract. This could be a roadblock in the path of a spot SOL ETF.
