Following the successful debuts of bitcoin ETFs in the US market, the attention now shifts to the potential approval of ether ETFs. With a decision from the SEC expected as early as May, David Lawant, FalconX’s head of research, and Purvi Maniar, the company’s general counsel, share their perspectives on the factors influencing this approval and argue that it’s more a matter of when rather than if.

In my expertise column, I explain how the approval process for cryptocurrency Exchange-Traded Funds (ETFs) has brought about regulatory clarity in various other areas.

–S.M.

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To Approve or Not to Approve? Point/Counterpoint Perspectives on the Upcoming Spot ETH ETF Decision

The current bull market has been marked by Ethereum (ETH) lagging behind, with doubts about the SEC’s approval of a proposed spot ETF on May 23 intensifying over the past weeks and causing this underperformance to worsen.

The proportion of Ethereum (ETH) to Bitcoin (BTC) prices has dropped under 0.05 for the first time since May 2021, when Ethereum started being seen as a desirable asset for institutions.

Crypto for Advisors: Are ETH ETFs Coming?

Through February 2024, there was widespread belief among investors that the SEC would give its approval to a Bitcoin ETF on May 23rd, based on their experiences with ETF approvals in early 2022. However, over the last few weeks, this optimistic outlook has shifted dramatically. The consensus view now is that the SEC will not grant approval. This change in sentiment is reflected in the significant increase in the discount between the net asset value (NAV) and the market price of the closed-ended Ethereum investment trust ETHE. In the past month, this discount has risen from 8% to over 25%.

As the May 23 deadline draws nearer, discussion around potential approval of ETFs based on Ethereum (ETH) is expected to persist in financial markets for the upcoming quarters. Let’s delve into the primary reasons both for and against this approval.

Point (the Consensus View): The Case for Denial

In the last several weeks, there have been signs in the market that the Securities and Exchange Commission (SEC) is unlikely to give its approval for a spot Ethereum (ETH) exchange-traded fund (ETF) by the end of May. This view is based on several key factors.

To begin with, the SEC has shown almost no interaction with issuers nearing the deadline. In stark comparison, the approval process for Bitcoin ETFs was marked by frequent back-and-forth exchanges between the SEC and applicants, as indicated by numerous amendment filings prior to approval. Contrary to certain claims, the recent invitation for public comments is a routine step and does not imply active involvement from the regulatory body.

An important consideration is the belief that the SEC reluctantly gave its approval for the BTC spot ETF. The functions of Ethereum, including decentralized finance, add to the intricacy of the SEC’s evaluation process.

The SEC has yet to provide clarification on whether Ethereum (ETH) qualifies as a security or not, in contrast to the Commodity Futures Trading Commission (CFTC), which considers ETH a commodity.

Counterpoint: The Case for Approval

Certain investors and financial experts are presenting compelling counter-arguments to the widely held view that no significant action will be taken in May, although they may not specifically advocate for approval during that timeframe.

Grayscale’s legal head pointed out that a lack of action doesn’t always mean a determined result. In contrast to the Bitcoin spot ETF approval procedure, there’s little debate left on the table at this time. The majority of discussions between Bitcoin ETF applicants and the Securities and Exchange Commission (SEC) revolved around redemption methods (cash or in-kind), an issue that has already been resolved.

The one area where there may be room for discussion would be whether the SEC would allow native staking of ETH. Despite the push by some issuers, the broad view is that staking is unlikely to be allowed initially. That’s a straightforward issue the SEC can resolve at a potential rule-change approval or later when it reviews the S1 (or S3) forms required before launch.

Another point to consider is that if a denial of the BTC ETF application was given, the applicants could respond with lawsuits. The approval of the spot BTC ETF heavily relied on the close relationship between the BTC spot market and the futures market at CME. Based on studies conducted by Fidelity, Bitwise, and Coinbase, similar correlations are present in the ETH market as well. Therefore, it is unlikely that the SEC would bring up this concern again when considering an ETH ETF.

Looking Ahead

In January, the approval of the BTC ETF was not a unanimous decision. The SEC had three commissioners voting in favor and two against, with Chair Gary Gensler holding the deciding vote. Gensler’s vote also holds significance for the upcoming Ethereum-backed ETF decision.

Among the more than 575 ETF proposals BlackRock has submitted to the SEC, only one was rejected. Will the proposed spot Ethereum ETF be the second to be denied? The market currently predicts a high likelihood of rejection, but crypto investors have learned from experience that unexpected developments can occur at the last minute.

After May 23, the approval process for ETH ETFs in the US market is expected to come to an end. It’s not a question of “if” they will be launched, but rather “when.” The reasons for approval are expected to be stronger than those for denial in the long run. Even if approval isn’t granted by May 23, the likelihood of it happening within the next 12-18 months is still significant.

– David Lawant, Head of Research, FalconX

Ask an Expert

Question: What do the U.S. spot bitcoin ETF approvals in the U.S. mean?

Bitcoín access is granted through approvals, underscoring significant investor interest in digital assets. ETFs serve as an uncomplicated method for financial advisors to incorporate crypto into their clients’ investment portfolios. The substantial inflows and assets under management (AUM) are difficult to disregard.

Question: Does this mean more approvals will be coming?

Looking at how regulatory approvals for ETFs have played out in other regions could provide some insight into what might be possible. For instance, the first spot bitcoin ETF was given the green light in Canada early in 2021, followed by ether ETFs a few months later. Currently, there are over eleven such ETFs available, including one for mixed cryptos and another for ether staking. If this trend continues, we might be close to seeing an approval for an ether ETF.

In simpler terms, Bitcoin Exchange-Traded Funds (ETFs) have been given the green light in Europe, Singapore, Australia, and Dubai.

Another significant development is the upcoming U.S. elections in November. The Republican Party appears particularly enthusiastic about cryptocurrency regulation and implementation. A shift in political power could have far-reaching consequences for the digital assets sector in the United States.

Question: What comes next?

Following Canada’s approval of ETFs, their securities regulators established a registration process and outlined guidelines for exchanges and cryptocurrency trading platforms to follow suit. Now that ETFs have arrived in the US, is registration next for these platforms?

Several businesses have recently filed proposals for bitcoin spot ETFs with the Hong Kong Stock Exchange. Starting from May, crypto-backed notes are permitted to be traded on the London Stock Exchange in the UK. It’s intriguing to observe how global approvals may influence the US and other markets. (Paraphrased version)

– Sarah Morton, chief strategy officer, MeetAmi Innovations Inc.

Keep Reading:

Some bitcoin ETF issuers don’t expect the SEC to approve ether ETFs anytime soon.

According to Deutsche Bank’s latest consumer survey, approximately 3,600 people were asked about their views on bitcoin. Fewer than 1% considered it a mere trend, while over half (52%) regarded it as an essential investment category and transaction method.

PWC recently released their 2024 global report that provides a breakdown of crypto regulations.

2024-04-11 19:08

Crypto for Advisors: Are ETH ETFs Coming?

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