Ethereum Spot ETF Approval is Near – Everything You Need to Know

The Spot Ethereum ETF has finally been approved after a period of uncertainty. Thursday's approval not only marked a milestone for Ethereum, but also a positive development in the U.S.'s regulatory approach to cryptocurrencies. This article takes a deeper look at the recent approval, its potential motivations, and its impact on the industry.

Summary of Spot Ethereum ETF Approval

On May 23, the U.S. Securities and Exchange Commission (SEC) approved Form 19b-4 related to eight spot Ethereum ETFs, including BlackRock's iShares Ethereum Trust, VanEck Ethereum Trust, Fidelity Ethereum Fund, ARK 21Shares Ethereum ETF, Franklin Ethereum ETF, Bitwise Ethereum ETF, Grayscale Ethereum Trust, and Invesco Galaxy Ethereum ETF.

The approval follows the debut of a spot Bitcoin ETF in the U.S. in January. However, unlike the Bitcoin ETF, the Ethereum product needs S-1 form approval to be fully operational, which is currently under review.

As reported by Crypto Briefing, the securities regulator recently began negotiations with ETF issuers regarding their S-1 forms, a development that also confirms previous speculation that the SEC had not engaged in sufficient communication with issuers during the review process.

Bloomberg ETF analyst James Seifert estimates that, given past precedent, it could take up to five months for the SEC to approve trading for an Ethereum physical fund, but the analyst suggested the timeline could be extended.

Key Factors Affecting Approval

According to the SEC's approval document, correlation between Ethereum futures and the spot market was one of the main factors influencing the decision.

Notably, the SEC conducted its own analysis to verify the correlation results provided by other commenters, including the Bitwise amendment, the Coinbase Letter, and the CF Benchmarks Letter. The SEC's findings corroborated the high correlations reported and demonstrated a strong connection between CME Ethereum futures and the spot Ethereum market.

Other considerations addressed in the approval documents include investor protection, market integrity, volatility and risk concerns.

However, Valeant Chief Legal Officer Jake Cherbinski argued in the filing that the SEC “may specifically avoid staking.”

Debate continues over the SEC’s position on Ethereum’s staking feature, with analysts considering the removal of the staking element or a no-staking statement in the Ethereum ETF application to be as important as other key factors influencing the decision.

Major firms such as Fidelity and ARK 21Shares initially included staking provisions in their SEC filings, but ahead of the SEC's deadline for a decision, these firms amended their filings to remove all mention of staking.

While there has been no further comment from the ETF issuer, these removals appear to be in response to the SEC's position that staking services may be considered unregistered securities offerings.

Historically, the SEC has taken a cautious approach to staking services.

For example, the SEC alleged that Kraken’s staking program, which allows users to deposit and stake crypto assets in exchange for rewards, was an unregistered securities offering in violation of U.S. securities laws. The case was resolved with Kraken settling with the SEC for $30 million, after which the company discontinued its staking services for U.S. retail clients.

Another case is the lawsuit filed by the SEC against Coinbase in June 2023. The SEC also alleged that Coinbase's retail staking service is a security.

Why is the approval of an Ethereum ETF important?

The SEC’s approval of the Spot Ethereum ETF hints at, but does not explicitly confirm, its stance on its underlying asset, Ethereum (ETH).

Rumors are circulating that the SEC considers most cryptocurrencies, except for Bitcoin, to be unregistered securities, which is consistent with statements made by SEC Chairman Gary Gensler, but the recent ETF approvals could be a potential rebuttal.

Coinbase Chief Legal Officer Paul Grewal and Valiant Chief Legal Officer Jake Cherbinski interpreted the recent approval as an implicit endorsement of ETH’s commodity status, since the ETF shares are based on a commodity.

“This week has been a rollercoaster ride unlike any I've ever seen before. ETH is effectively being viewed as a commodity as we've always known it,” Grewal said.

“…it's pretty clear: 'commodity-based trust shares,'” Chervinsky noted.

Why is delegated authority not important?

The Spot Ethereum ETF approval was issued through a delegated authority, eliminating the need for a public commissioner vote. This arrangement raises concerns as it gives commissioners the technical right to challenge decisions and request reconsideration.

But Bloomberg ETF analyst James Seifert said the request for reconsideration was unlikely to change the outcome.

According to him, SEC commissioners will not allow the Division of Trading and Markets to issue such a certification unless a majority of commissioners support that decision. This consensus among commissioners suggests a strong underlying agreement on the certification.

I say “nothing changed” because the SEC Commissioner would not have authorized the Trading and Markets Division, through its delegated authority, to create/issue this approval order unless a majority of the Commissioners concurred in that decision.

— James Seifert (@JSeyff) May 23, 2024

In essence, the approval of spot Ethereum ETFs under the delegated authority signals the imminent launch of these ETFs.

Possible enforcement action against Ethereum-related entities

The recent approval of a spot Ethereum ETF came as a pleasant surprise, given the SEC’s alleged legal threats against Ethereum-related entities such as the Ethereum Foundation and ConsenSys.

The bureau has reportedly launched a campaign to classify Ethereum (ETH) as a security, a move that many believe would hurt the prospects of approving an Ethereum-based ETF.

Against this backdrop, combined with the lack of engagement reported by insiders and the generally pessimistic outlook from ETF issuers and experts, made the favorable decision on May 23rd particularly unexpected.

Experts had speculated that the SEC was reluctant to approve ETFs tied to ETH because it wanted to classify the cryptocurrency as a security, but the current political situation in the United States appears to have influenced the SEC to change its stance and approve these ETFs.

However, this approval does not mean that the parties involved are completely immune from liability: the SEC may still treat the sale of ETH tokens during Ethereum’s 2014 ICO as an “investment contract.”

If this is true, it would likely mirror Ripple's lawsuit against the SEC, in which the SEC argued that sales of XRP from 2013 to 2020 constituted “investment contracts.”

According to a court ruling last year, secondary market sales of XRP do not constitute an “investment contract,” but sales by institutional investors are considered unregistered offers and sales of investment contracts under the Howey test.

Apart from these possibilities, in a less likely scenario, the SEC may not intend to sue the company.

Recent legal threats, including those targeting Uniswap, may not be a genuine reflection of wrongdoing but rather a strategy to intimidate or pressure cryptocurrency companies, a view previously supported by Chervinsky.

The SEC sent a Wells Notice to Robinhood.

The numbers they have sent out regarding cryptocurrencies over the past few months are staggering. It is hard to imagine they would take (or have taken) so many enforcement actions at once.

It appears that they are now using the Wells Act as a blackmail tool.

— Jake Chervinsky (@jchervinsky) May 6, 2024