The United States Securities and Exchange Commission (SEC) approved the sale of spot Ethereum exchange-traded funds (ETFs) in the United States on May 23, 2024. The SEC incorporated proposals from Nasdaq, New York Stock Exchange, and CBOE Exchange, which requested changes to existing rules to allow trading of Ethereum exchange-traded funds (ETPs) and ETFs.
This is the SEC's second decision on crypto exchange-traded products. Earlier this year, in January 2024, the SEC approved a Bitcoin ETF and ETP after a lengthy battle. Exchanges had sought SEC approval for rule changes necessary to list these new products, which they received. However, trading will not begin immediately, as issuers need the SEC to approve a separate ETF registration statement detailing investor disclosures. ReutersIndustry sources said it was unclear how long the SEC approval process would take.
This illustrative photo taken in Krakow, Poland, shows a representation of the Bitcoin cryptocurrency. … [+]
SEC Concerns
In its accelerated approval, the SEC primarily focused on the following:
Preventing fraud and manipulation: the importance of CME
Turning to Section 6(b)(5) of the Securities Exchange Act, the SEC emphasized: The Need for a Comprehensive Surveillance Sharing Agreement We work with the Chicago Mercantile Exchange (CME) to detect and stop fraud and manipulation. Each exchange maintains a comprehensive surveillance sharing agreement with CME through their mutual membership in the Intermarket Surveillance Group. However, CME does not currently monitor the spot ether market, raising concerns about efficient surveillance and the ability to detect fraud and manipulation. Spot ether is not traded on CME, but futures contracts are. As such, correlation The price difference between the futures and spot markets means that price manipulation in the spot market is likely to affect the futures market as well.
To demonstrate this correlation, the Exchange submitted a correlation analysis aimed at determining whether price movements in the CME Ethereum futures market closely match price movements in the spot Ethereum market. This analysis is essential in assessing whether CME's futures market surveillance can effectively detect and deter fraud and manipulation in the spot Ethereum market.
In addition to the analysis submitted by the applicants, the SEC conducted its own correlation analysis, reviewing hourly, five-minute, and minute-by-minute price data for CME Ethereum futures and the spot ETH/USD trading pair on major platforms (Coinbase and Kraken) to understand different levels of trading activity over an extended period of time (October 1, 2021 to March 29, 2024). The results of the SEC's analysis are as follows: Confirmed The CME Ethereum futures market has shown to be consistently highly correlated with this subset of the spot Ethereum market throughout the past 2.5 years.
Investor Protection and Market Integrity
Additionally, in its decision, the SEC analyzed Section 11A(a)(1)(C)(iii) of the Securities Exchange Act to ensure that the Ethereum-based ETP proposal provides sufficient protections for investors and maintains market integrity.
As with the Spot Bitcoin ETP Approval Order, there are some key requirements.
- Availability of pricing information – Availability of quotes and last trade information for each ETP via its securities information processor, availability of Intraday Indicative Values (IIV) and net asset values on each ETP's website, and distribution of IIVs by major market data vendors (updated every 15 seconds during regular trading hours)
- Portfolio Holdings Transparency – ETPs must regularly disclose their portfolio holdings, including the amount of Ethereum and cash or cash equivalents they hold. This information must be updated, typically daily, and made publicly available on the ETP's website and other major financial information platforms.
- Monitoring Procedures and Monitoring Sharing Agreements – Similar to its agreement with CME, exchanges will be required to enter into data exchange agreements with other regulated markets to share information and strengthen their ability to detect and prevent fraud and abuse. Additionally, exchanges will be required to specify the conditions under which they will implement trading halts or suspensions.
Other concerns: Volatility and risk
The final part of the SEC's analysis states: Other commentsThe SEC held further discussion among commenters on investor protection, environmental considerations, and volatility and risk concerns.
Regarding volatility and risk concerns, one commenter expressed concern about Ether’s price volatility and that the Spot Ether ETP “It threatens individual investors and the entire financial system.” The SEC considered these potential benefits and concerns in a broader context and concluded that the proposal meets the requirements of the Securities Act, including preventing fraud and deceptive practices.
Reading the response to this concern, the SEC ultimately did not address the issue. Market volatility is natural and may be attractive to many investors. Here the buyer's responsibility appliesHowever, the primary concern on which the SEC and other regulators must focus is the impact that the convergence of cryptocurrencies with traditional finance will have on the broader financial system as we know it. The gradual convergence and introduction of multiple derivative assets could have significant effects on the financial system that have gone largely unexplored and unaddressed. Ignoring these potential consequences could lead to a repeat of 2007-2008, but on a much larger scale.
