Experts: Spot Ether ETFs not the boon industry thinks

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As a seasoned crypto investor with a background in blockchain technology and market analysis, I’m both excited and cautious about the recent approval of spot Ethereum ETFs by the SEC. While this development brings much-needed regulatory clarity on Ether’s non-security status, it may also introduce unintended consequences for the ecosystem.

The SEC’s approval of Ethereum ETFs could bring clarity regarding Ether’s classification as a non-security, but experts caution that such a decision might also result in unintended consequences for the Ethereum network.

The SEC, after much consideration and postponed rulings, has given its nod to Ether (ETH) ETFs in the US market. However, it’s important to note that this approval is initially confined to 19b-4 filings. The actual authorization for trading could take additional months as issuers’ more comprehensive S-1 applications are still being evaluated.

James Seyffart of Bloomberg pointed out that the approval process for actual trading may last for several months.

As a researcher, I’ve found that the timeline for approval of Bitcoin ETFs has historically ranged from several months up to 5 months in some cases. However, Eric Balchunas and I suspect that this process may be expedited somewhat. Keep in mind, though, that we’ll need more information to determine the exact timeframe. Previously, Bitcoin ETF applications required a minimum 90-day waiting period before a decision could be made. We’ll find out more details soon.

— James Seyffart (@JSeyff) May 23, 2024

From my perspective as a researcher, the recent approval of spot Ethereum (ETH) exchange-traded funds (ETFs) by the industry has been heralded as a significant advancement, drawing parallels to the approval of similar products for Bitcoin (BTC). Three experts I spoke with at crypto.news shared their belief that these funds could have far-reaching implications beyond what some may currently anticipate.

Centralization and Ether dormancy

One significant distinction between ETFs based on Bitcoin (BTC) and Ethereum (ETH) is the unique consensus mechanisms each blockchain uses. Bitcoin relies on the proof-of-work mechanism, which encourages miners to solve intricate mathematical problems in order to add new transactions to the blockchain and earn rewards.

As an analyst, I would put it this way: The straightforward nature of Bitcoin’s design, which lacks sophisticated smart contracts and a well-developed decentralized finance (DeFi) ecosystem, encourages individuals to transact and keep their holdings within the cryptocurrency.

Ethereum stands out. Despite not yet having fully transitioned to a proof-of-stake system, Ethereum has fueled a thriving decentralized finance (DeFi) sector valued in the billions of dollars. It is specifically engineered for on-chain implementation.

Carlos Mercado, a data scientist at Flipside Crypto, expressed his view that the inability to utilize Ethereum (ETH) housed within funds is inconsistent with the asset’s benefits. In simpler terms, “Mercado believes it’s wasteful not to put Ethereum held in funds into use, just as hoarding barrels of gasoline isn’t productive.”

Staking may have addressed this concern, but all staking language was withdrawn from several updated spot Ethereum ETF bids. The SEC also cracked down on staking service providers like Coinbase, adding further speculation around U.S. crypto staking adoption.

As a researcher studying the Vega Protocol, I’ve come across Tom McClean’s perspective that eliminating staking features helped reduce concerns about centralization. However, his assessment falls short of completely resolving the issue. Rather than having issuers assign Ethereum to a solitary validator or a privileged few, it seems likely that ETFs (Exchange Traded Funds) will merely purchase, hold, and sell Ethereum tokens.

I, as an analyst, would put it this way: “This situation could lead to a significant amount of Ethereum being kept idle and unutilized within the system, including ETH that is not staked or used for transaction fees (gas), according to McClean’s assessment.”

Regulatory clarity

From another perspective, McClean posits that the decision could spur both investors and issuers to request more definite regulatory guidelines regarding staking. Justin d’Anethan, Head of Business Development at Keyrock (APAC), shares this viewpoint, stating that the sanctioned filings appear to validate Ether as a non-security.

A crypto executive made it known that Ethereum ETF applications weren’t filed following the same procedure as those for securities-linked ETFs. This observation could be interpreted as a potential indication by regulators that Ether may not be classified as a security. Such a determination would bring relief to numerous investors and stakeholders in the Ethereum community.

Despite the indications from the presented arguments and sanctioned documents implying a significant shift in the Securities and Exchange Commission’s (SEC) stance regarding Ethereum’s classification as a financial instrument, it remains uncertain how the regulatory body truly perceives this asset.

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2024-05-24 19:40