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3 Questions About the SEC’s Abrupt ETH ETF Approval

May 23, 2024

As a seasoned crypto investor with a keen interest in regulatory developments, I’m thrilled to see the U.S. Securities and Exchange Commission (SEC) approve rule changes for exchange-traded funds (ETFs) holding Ethereum’s native token, ETH. Although many were caught off guard by this decision, given last week’s widespread belief that it was a lost cause, I’m not surprised.

The U.S. Securities and Exchange Commission (SEC) confirmed yesterday it has approved critical rule changes to allow for exchange-traded funds holding Ethereum’s native token, ETH. A lot of people were caught off guard, considering that just last week nearly everyone – from Bloomberg analysts to prediction markets – thought it was a lost cause.

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I found it puzzling why SEC Chairman Gary Gensler has been hesitant to approve spot Ethereum products, given the agency’s past experience with the contentious issue of listing Bitcoin ETFs.

A three-judge panel in the appeals court found the Securities and Exchange Commission’s (SEC) repeated denial of spot bitcoin and ETH funds to be “arbitrary and capricious.” This decision came despite the fact that the SEC had previously approved bitcoin futures products, which functioned in a similar manner. It is plausible that a company would have been prepared to challenge this ruling in court, much like Digital Currency Group did for bitcoin ETFs.

As a crypto investor, I’ve noticed that the SEC’s recent decision feels arbitrary once again, but this time it’s in the opposite direction of what many expected. In an interview with Jesse Hamilton from CoinDesk before the announcement, Gensler mentioned his intention to “follow the interpretation of the law by the courts” and acknowledged that “the DC Circuit took a different view, which we considered carefully and adjusted our stance accordingly.”

See also: Ether ETFs Clear Major Hurdle, Though SEC Hasn’t Cleared Them for Trading Yet

As a seasoned crypto market analyst, I’ve been pondering over the recent surge in Ethereum’s price. So what’s the deal here? Why is Ethereum experiencing such a significant price jump all of a sudden?

Was the decision politically motivated?

It’s worth noting that there have been significant developments in the regulatory landscape for cryptocurrencies. Last Thursday, an important cryptocurrency-related bill passed in the House of Representatives, marking a substantial milestone. This action followed both houses of Congress voting to abolish a contentious SEC rule concerning crypto custody accounting.

As an analyst, I’ve been closely following the developments in the U.S. government’s approach to cryptocurrencies, and it seems that we are approaching a pivotal moment in this long-standing battle. With Democrats playing key roles in both pieces of legislation, the crypto market structure bill, FIT21, has received significant support. Notably, President Biden made the decision not to veto this bill despite the White House’s official opposition – a substantial move that indicates a shift in the administration’s stance towards cryptocurrencies.

Perhaps these occurrences on Capitol Hill served as a gauge, signaling to Gensler that his crypto regulatory stance could potentially lead to political complications. It’s worth noting that recent announcements by former President Trump endorsing cryptocurrency have heightened interest in the asset class. Rejecting ETH ETF applications under the guise of unproductive SEC meetings with applicants might prove advantageous for such a high-profile figure.
The SEC has only given the green light for Cboe, NYSE Arca, and Nasdaq to file prospectus applications for ETH ETFs, meaning these exchanges can list the funds once the relevant firms’ regulatory filings are approved. However, this process could take several months to complete.

What does it mean for Ethereum?

Initially, the introduction of spot Ethereum funds signifies a potential surge in institutional investment towards the second largest cryptocurrency. This development serves as an endorsement and provides a convenient entry point for purchasing the asset. It caters to various investors, ranging from individual retirees aiming to diversify their 401(k)s to large hedge funds. Similar to how ETFs facilitated access to Bitcoin for numerous investors.

Many individuals were taken by surprise with the Ethereum ETF announcement. Although the Bitcoin ETF paved the way for wirehouses and large registered investment advisors to create a crypto ETF blueprint, I believe that numerous institutional investors are now rushing to prepare their sales teams for Ethereum and set up the necessary frameworks. (Framework Ventures co-founder Michael Anderson’s statement)

As an analyst, I’d explain it this way: ETFs serve as a convenient tool for investors to access various asset classes, including Ethereum. However, there’s a possibility that these ETFs could attract more users towards the Ethereum network itself. Here’s a potential scenario: Since the SEC might not permit fund managers to stake the underlying ETH, new investors may opt to take matters into their own hands and stake their Ether directly to earn the additional yield of around 3.5%. This could lead to an increase in the number of users actively engaging with the Ethereum network.
In relation to this, Jake Chervinsky, the Variant Chief Legal Officer, pointed out on X that the approval of these funds for trading could provide clarity on a pressing issue: whether ETH is classified as a security by the agency. If unstaked ETH is not considered a security in light of this decision, it could encourage more institutions to enter the market due to reduced regulatory uncertainty.
From a more technical perspective, there are several unanswered questions regarding Ethereum’s implications if large-scale purchases of ETH occur through popular funds similar to Bitcoin ETFs. To an extent, this could lead to substantial demand for the network and associated Layer 2 solutions.

Ethereum introduced a mechanism that eliminates tokens with each transaction, resulting in deflation for an extended period. However, due to the increasing use of Layer 2 solutions and alternative chains like Solana, Ethereum’s transaction volumes have significantly decreased. Consequently, Ethereum’s Ether supply is expanding once more, which could influence its long-term pricing and market demand. Exchange-traded funds (ETFs) may assist in stabilizing the economic aspects of Ethereum.

See also: Ethereum ETF Approval Could Spur 60% ETH Rally as
It’s intriguing to observe the potential impact of these funds on Ethereum staking. The ease of use provided by platforms like Lido has allowed individuals to stake even small amounts of ETH. However, there are growing worries about the increasing amount of staked ETH, and the introduction of ETFs could exacerbate this issue by drawing even more ETH out of circulation.

What does this mean for chains like Solana?

From my perspective as an analyst, the approval of Ethereum-based Exchange Traded Funds (ETFs) signifies a significant endorsement for Ethereum. This approval could potentially serve as a catalyst for Ethereum to further solidify its prominent brand position within the cryptocurrency landscape.

As an analyst, I believe that if the Ethereum ETF manages to attract only a fraction of the institutional investments that the Bitcoin ETF did, Ethereum is likely to establish itself as the undisputed top decentralized application platform for the foreseeable future in terms of market share and valuation.

The decision could pave the way for newer cryptocurrencies such as Cardano, Solana, and Ripple to penetrate the sophisticated financial sector. Bitcoin and Ethereum had a head start due to earlier adoption by established financial institutions like CME. Ether futures have been available on CME since 2018, whereas it’s uncertain if similar support is being extended to other digital assets.

The SEC has indicated that it considers Ethereum (ETH) as a security, but it has explicitly stated that Solana (SOL), Cardano (ADA), and Algorand (ALGO) do not meet the criteria of an investment contract according to the Howey Test. This development might present a hurdle for a spot-traded Ethereum ETF, but could pave the way for similar products based on Solana, Cardano, and Algorand.

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2024-05-24 22:18