On January 10, 2024, the U.S. Securities and Exchange Commission (SEC) approved the listing and trading of multiple ETFs (exchange-traded funds) that track Bitcoin on the spot market, the world’s largest cryptocurrency by market capitalization. The financial regulator approved applications for 11 issuers, including but not limited to Ark Investments, Fidelity, BlackRock, and VanEck. One of the filings, made by Grayscale, envisaged the conversion of the Grayscale Bitcoin Trust into an ETP (exchange-traded product). As the SEC has pointed out, this doesn’t indicate its willingness to approve listing standards for crypto asset securities.
An ETF is the simplest, most easily understandable way of investing in assets or groups of assets because it doesn’t involve the ownership of securities. Anyone can invest without storing the keys for a wallet, signing up for a cryptocurrency exchange, or worrying about security. Many see value in a spot Ethereum ETF, but approval may be more problematic because the cryptocurrency risks being classified as a security. Cryptocurrency advocates agree that such a development would push Ethereum further into the financial mainstream. At any rate, a decision to approve ETF applications would be a win-win for everybody.
There Are Concerns That a Spot Ethereum ETF Approval Could Be a More Complex Proposal
Cryptocurrencies other than Bitcoin are viewed as securities regardless of the context in which they’re sold, such as coins sold directly to institutional investors or through secondary market transactions to retail investors. Ethereum has forever been treated as a commodity by state and federal regulators, so if it’s classified as a security, exchanges wishing to list it would have to register as securities broker-dealers with the SEC. Grayscale and BlackRock’s attempts to transform their trusts into ETFs were rejected, underlining the importance of Ethereum’s categorization.
Ethereum Is Commonly Held as An Investment, So It Could Be Classified as A Security
The SEC remains largely hostile towards crypto assets, to say nothing of the fact that it might contemplate Ethereum as a security, as opposed to Bitcoin, which is regarded as a commodity. When asked about whether the approval of the first U.S. ETFs that hold Bitcoin would other cryptocurrency ETF approvals, Gary Gensler, who serves as Chair of the SEC, affirmed that a spot Ethereum ETF is unlikely to be approved in 2024. He said the vast majority of crypto assets are investment contracts, so they’re subject to federal security laws, and failing to comply can result in criminal liability.
Ethereum has drawn the attention of regulators beginning in 2022, when it replaced its consensus mechanism with a Proof of Stake system, laying the foundation for future scalability improvements on the blockchain. By transitioning to the Proof of Stake, which was suggested years before the Ethereum network was created, the cryptocurrency no longer relies on competition between computers but on a pooling method that encourages users to own and stake Ethereum. Some have suggested that Ethereum is a security due to its infrastructure, which is maintained by a small group of contributors.
The Spot Ethereum ETF Approval Could Come After the November 2024 Election
According to TD Cowen, a top investment bank, a spot Ethereum ETF might be approved in late 2025 or early 2026, following the 2024 presidential election. To be more precise, there are political calculations behind Gary Gensler’s declarations, who will defer his sensitive decision until after 2024. Gensler is a Democratic party activist with numerous allies in Washington. At the time being, the Chair of the SEC is facing scrutiny over an increasing workload and return-to-office policies. A veteran of the Clinton and Obama administrations, Gensler has drawn the anger of many people due to an ambitious regulatory agenda.
CIO Lucas Kiely of Yield App points out the fact that it doesn’t matter whether Ethereum is a security or not once it becomes an ETF. If approved, a spot Ethereum ETF would attract millions of new investors who were previously unable (or unwilling) to purchase cryptocurrency directly. If market conditions remain strong, further pressure will be applied to make the crypto asset available to institutions. The fact of the matter is that approval isn’t a question of if but when. If the SEC wants to get geared up and ready to go, they’ll likely do it sooner.
Futures-Based Ethereum ETF Products Are Already Available for Trade in The U.S. Market
While investors wait for the SEC to approve a spot Ethereum ETF, it’s worth mentioning that futures-based Ethereum ETF products offer convenient exposure to the underlying asset’s price through a fund that trades like stocks. The ETF invests in Ethereum futures contracts instead of holding physical coins, enabling those interested to speculate on the future price movements of Ethereum without holding the cryptocurrency directly. It provides continuous investment exposure, so investors don’t have to roll over their positions into new contracts. While convenient for mainstream investors, futures-based Ethereum ETFs add a layer between investors and the underlying asset.
Surprising or not, these financial products have had little to no success, launched without much interest from traders. The biggest issue of a futures-based Ethereum ETF is it doesn’t hold cryptocurrency directly but holds positions in the Ethereum futures market, so investors merely own shares in a fund that invests in Ethereum futures contracts. Let’s not forget about Ethereum’s frequent and extreme volatility, making it suitable only for investors with a high-risk tolerance. If the futures price is higher than the spot price, it can affect the returns of the futures-based ETF as it rolls over contracts.
Concluding Thoughts
All things considered, it’s unlikely the approval of a spot Ethereum ETF will happen this year, so it’s much more challenging than previously thought. The current silence may indicate an imminent classification of Ethereum as a security, which will significantly impact the cryptocurrency space in terms of trading, issuance, and investment regulations. It’s probable that a spot Ethereum ETF will get the green light following the 2024 presidential elections. For now, politicians refuse to consider even the honest parts of the cryptocurrency industry as legitimate.
