Battle for Ethereum ETFs turns messy in the US — what’s next?

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As an analyst with a background in financial regulation and cryptocurrencies, I believe that the regulatory uncertainty surrounding Ethereum’s status as a commodity or security is delaying the launch of exchange-traded funds (ETFs) based on ETH‘s spot price in the U.S. The lack of clear guidance from the SEC has left crypto firms exasperated and other jurisdictions gaining a first-mover advantage.

As a crypto investor, I’ve been following the developments regarding the much-anticipated Bitcoin ETF closely. Michael Saylor, a well-known figure in the industry, has expressed his doubts that such an ETF will be launched at all. Furthermore, some fund issuers share his skepticism, deeming it unlikely for this year. On the other hand, countries like Canada and El Salvador are making significant strides in this area, potentially gaining a first-mover advantage.

The competition to introduce Ethereum-linked spot price exchange-traded funds (ETFs) in the United States is intensifying, following a path akin to Bitcoin’s complex and lengthy regulatory approval process.

The SEC continues to delay providing clear answers regarding previously submitted applications. This response is significant as it would enable investors to access Ethereum (ETH) through investment vehicles, rather than having to directly own the digital asset itself.

As a researcher investigating regulatory updates, I’ve come across an interesting development regarding Grayscale and Franklin Templeton. Both entities were initially anticipating responses from the Securities and Exchange Commission (SEC) by April. However, I’ve recently learned that the SEC has decided to postpone these deadlines, now extending them to June.

Fidelity and BlackRock, like VanEck and ARK Invest, have seen their application plans stalled. A decision from the authorities is anticipated for VanEck and ARK Invest later this month, but optimism about approval has been waning rapidly.

The reason being, indications exist that the regulatory body considers Ether as an investment contract or security rather than a commodity similar to Bitcoin.

A growing dispute

In June 2023, during my testimony before the House Financial Services Committee, I, as the Chair of the Securities and Exchange Commission (SEC), declined to express my personal view on whether Ethereum (ETH) should be classified as a security.

The absence of a definitive response from the regulatory body had alarmed the cryptocurrency community, all the more so since it went against prior directives given by Jay Clayton in his tenure as head of the same body.

Around September 2022, before The Merge even occurred, Gary Gensler started dropping subtle hints that the crypto staking process could potentially be subject to securities regulations.

The significance of Ether lies in the fact that it influences which American organization is responsible for its regulation. If classified as a security, this designation could potentially create complications for other cryptocurrencies.

Recently, Consensus filed a lawsuit against the SEC, vigorously defending Ethereum. They contend that the SEC’s actions, which they deem an “unlawful power grab,” have the potential to weaken America’s role as a trailblazer in developing the next generation of the internet.

The Case for #Bitcoin on the Corporate Balance Sheet

— Michael Saylor⚡️ (@saylor) May 3, 2024

Saylor’s prediction

Michael Saylor, the executive chairman of MicroStrategy and a prominent backer of Bitcoin, expressed his skepticism towards the approval of Ethereum-based Exchange Traded Funds (ETFs) during his speech at the Bitcoin for Corporations conference. He cautioned the audience that such ETFs might never come into existence.

“Some time this summer, it’ll be very clear to everyone that Ethereum is deemed a cryptoasset security, not a commodity. After that, you’re gonna see that Ethereum, BNB, Solana, Ripple, Cardano — everything down the stack — is just a cryptoasset security unregistered. None of them will ever be wrapped by a spot ETF, none of them will be accepted by Wall Street, none of them will be accepted by mainstream institutional investors as cryptoassets. [Bitcoin] is the one universal, consensus accepted, institutional-grade cryptoasset in the world. There won’t be another one.” 
Michael Saylor

As a crypto investor, I can understand why some might view Michael Saylor’s criticism of Ethereum as biased, given his strong belief in Bitcoin’s technical and ethical superiority. At the Blockchain Economy Istanbul Summit in July 2022, however, I recall him raising valid concerns about Ethereum’s frequent upgrades. In my opinion, these continuous modifications introduce new vulnerabilities that could potentially weaken Ethereum’s security and reliability.

What happens next? 

It seems that the main issue at hand is the absence of effective communication between the SEC and companies aiming to launch an Ether Exchange-Traded Fund (ETF). According to a report by Barron’s published last month, these applicants are not receiving “the essential feedback required to perfect their offerings.” In contrast, Bitcoin ETF issuers had previously experienced an active exchange of ideas before the launch of their funds.

As a crypto investor following the developments of Van Eck and CoinShares, I’ve been keeping a close eye on their anticipated applications with the SEC. Van Eck, head of his eponymous investment firm, openly shared his perspective during an interview with CNBC in April, stating that he thinks “the application will likely be denied.” On the other hand, Jean-Marie Mognetti from CoinShares expressed a similar yet more definitive viewpoint, predicting that “no approvals will occur in 2024.”

As regulatory ambiguity persists in the United States and leaves crypto companies frustrated over Ether’s undefined standing, other regions are seizing the opportunity to take the lead.

On the initial day, trading activity was relatively low. However, it’s worth noting that Hong Kong recently introduced an ETF for Ethereum (ETH). This development comes with anticipation that it may eventually allow Chinese investors access to this digital asset class.

I’ve come across an interesting observation from S&P Global. They mentioned that Ethereum-based funds, which track the cryptocurrency’s spot price, have already gained approval in various countries like Canada, Switzerland, Sweden, and Germany. Some of these funds even provide additional returns through staking.

As ETFs in other regions continue to amass significant wealth, with billions of dollars in assets under their management, the United States could find itself increasingly outpaced.

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2024-05-06 14:24