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3 Questions About SEC’s Abrupt ETH ETF Approval
The US Securities and Exchange Commission (SEC) confirmed yesterday that it has approved critical rule changes for allow exchange-traded funds containing Ethereum’s native token, ETH. Many people were taken by surprise, considering that last week almost everyone – from Bloomberg analysts to the forecast markets – thought it was a lost cause.
Note: The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
It never made sense to me why SEC Chairman Gary Gensler would resist approving these spot ETH products, considering how embarrassed the agency was during its proactive fight for the listing of bitcoin ETFs.
Recall that a three-person panel of judges on an appeals court called the SEC’s reasoning for denying (and denying and denying) bitcoin spot funds “arbitrary and capricious” as it had previously approved bitcoin futures products that did substantially the same thing. The same situation has has been true for ETH as well, and it’s likely that some firm would have been happy to litigate the issue in the same way that the Digital Currency Group fought for bitcoin ETFs.
This time, the SEC’s decision seems equally arbitrary, just in the opposite direction. On a interview with CoinDesk’s Jesse Hamilton Hours before the approval became public, Gensler said he would follow “how the courts interpret the law” and that “the D.C. Circuit took a different view, and we took that into consideration and changed.”
So why now? What does this mean for Ethereum going forward? And does this bode well for other cryptocurrencies?
As many have already noted, it appears that there has been a sea change regarding the regulatory situation in crypto. On Thursday, the House held a historic vote to approve the most substantive piece of cryptocurrency-specific legislation to date. This came shortly after the upper and lower houses of Congress voted to repeal a controversial SEC crypto custody accounting rule.
With significant Democratic participation in both bills, it appears the US government’s long war against encryption is coming to an end. Notably, President Biden announced that he would not veto the crypto market framework bill, FIT21, which the White House officially opposes – quite a major concession.
It’s possible that all these events on the Hill acted as a temperature check and helped convince Gensler that his approach to cryptography was becoming a political liability. After all, former President Donald Trump just announced his support for crypto in a big way — and denying ETH ETFs on the grounds, allegedly, that the SEC wasn’t having “productive” meetings with candidates would be great ammunition.
To be sure, the SEC has not approved the listing of ETH ETFs anytime soon – only the 19b-4 proposals from Cboe, NYSE Arca, and Nasdaq, which would allow them to list the funds as soon as companies like Ark Invest, Bitwise, BlackRock, Fidelity, and Grayscale , among others, obtained approval of their S-1 filings. This could take months.
Well, firstly, the launch of ETH spot funds means that there could soon be a lot more institutional interest in the second-largest cryptocurrency. Not only did the move act as a stamp of approval of sorts, but it will also create a family-friendly on-ramp into purchasing the asset for anyone from family investors looking to diversify their 401(k)s to hedge funds, much in the the same way ETFs did with bitcoin.
“Many people were taken by surprise by the Ethereum ETF announcement. While the Bitcoin ETF has created a crypto ETF roadmap for wirehouses and large registered investment advisors, I still expect that many institutional stakeholders are now scrambling to prepare their sales teams on the state of Ethereum and put together the proper infrastructure,” said Framework Ventures . said founder Michael Anderson in an email statement.
And while ETFs are really just a vehicle for gaining exposure to an underlying asset, it’s also possible that these funds could attract more users to Ethereum itself. One scenario: Since the SEC likely won’t allow fund managers to stake the underlying ETH, it’s possible that new Ether investors will determine they want to do it themselves to earn that extra bit ~3.5% yield.
Likewise, as General Counsel at Variant, Jake Chervinsky observed at X, the approval likely answers a lingering question: whether or not ETH is a security. Chervinsky said that if these funds could be traded, it would likely mean that unstaken ETH, in particular, would not be viewed as a security at the agency. This alone could encourage more institutions to enter the market, considering many are currently holding off simply due to regulatory uncertainty.
On a more technical level, there are many open questions about what it would mean for Ethereum in a world where these funds buy large amounts of ETH (assuming they are as popular) as bitcoin ETFs. To some extent, the buying pressure would be great for the network and surrounding layer 2s.
Ethereum has instituted a burn mechanism that destroys tokens with each transaction, which has long made the asset class deflationary. But with the growing popularity of L2s and alternative chains like Solana, Ethereum transaction volumes have fallen to the point that the supply of ETH is growing again, which raises long-term implications for the asset’s price and demand. . ETFs could help support the ETH economy.
Finally, it will be interesting to see how funds affect the staking economy. Some people have been sounding the alarm about the amount of ETH being staked now that apps like Lido make it very easy for people to lock up even small amounts of crypto. With the possibility of ETFs taking even more ETH out of circulation, these concerns could be compounded.
As mentioned, the approval of ETH ETFs is an endorsement of sorts for Ethereum and likely an opportunity for the network to secure its already dominant brand position.
“Assuming the Ethereum ETF sees at least a fraction of the institutional flows that the Bitcoin ETF saw, I think it is entirely possible that Ethereum will solidify itself as the undisputed leader in decentralized application platforms in the coming years, at least in terms of market share and evaluation,” said Anderson.
But the move could also open the door for alternative chains like Cardano, Solana and Ripple to further enter the world of high finance. Of course, bitcoin and ETH had an easier time (everything in perspective) because financial operators like CME had already adopted them. Ether futures have already been active on the CME for three years, although it is not even clear whether other crypto assets are being considered.
It’s also worth noting that while the SEC has hinted that it thinks ETH is a security, the agency has proactively come out and said that assets like SOL, ADA, and ALGO fall within the definition outlined by the Howey Test used to determine whether something is an investment. contract. This could be a stumbling block on the path to a SOL ETF in sight.