As the U.S. Securities and Exchange Commission (SEC) approaches its decision on spot Ethereum exchange-traded funds (ETFs), skepticism is growing among industry experts. These experts highlight concerns over the complex relationship between Ethereum (ETH) futures and spot markets, along with potential security issues that could hinder the regulatory approval of these ETFs. This growing skepticism is clouding the outlook for the approval of spot Ethereum ETFs.
Nate Geraci, President of the ETF Store, emphasized the necessity of SEC approval for both a 19b-4 change in trading rules and an S-1 registration statement for any ETF launch. However, the process may face delays, particularly in S-1 approvals, even if 19b-4s receive approval. In a separate discussion, James Seyffart, an ETF analyst at Bloomberg Intelligence, expressed strong doubts about the approval of spot Ethereum ETFs due to the weak correlations between futures and spot markets observed in 2021.
Seyffart stated, “Overall, I think it’ll be something somewhat objective that just kicks the can down the road. If I had to guess, I’d say correlations. Primarily pointing to the futures and spot correlations from 2021, which were quite weak over 1 min and 5 min intervals.” He further explained that the SEC might argue that “the futures market hasn’t been sufficient on a 3-year look back period for detecting fraud and manipulation in the spot market.” It’s important to note that this same argument led to the SEC being sued by digital asset manager giant Grayscale.
Security classification concerns present another significant hurdle. Scott Johnson, a general partner at Van Buren Capital, highlighted that the SEC is considering treating Ethereum as a security in the upcoming spot ETF order. Current laws require the SEC to provide “notice of the grounds for disapproval under consideration.” This question has been asked in all the Ethereum filings, yet Johnson believes the SEC never asked such questions when filing a Bitcoin ETF. “The obvious purpose is to potentially deny on the basis that these spot filings are improperly filed as commodity-based trust shares and do not qualify if they are holding a security,” Johnson said.
David Han, an institutional research analyst at Coinbase, added another layer of complexity to the debate. He pointed out the differences between Bitcoin’s proof-of-work (PoW) and Ethereum’s proof-of-stake (PoS) mechanisms. Han mentioned that the regulatory environment for asset staking remains unclear, especially for spot Ethereum ETFs that allow staking. He argued that the risks associated with staking, such as slashing conditions, validator client variations, fee structures, and liquidity issues, make it unlikely for the SEC to approve spot Ethereum ETFs in the near future.
This perspective aligns with recent adjustments by ARK Invest and 21Shares. The firms reportedly amended their spot Ethereum ETF application to remove clauses related to staking. Initially, they aimed to stake Ethereum (ETH) held by the firm, which would have counted as income for the fund. The SEC’s upcoming deadlines to respond to spot Ethereum ETF applications from VanEck and ARK Invest are May 23 and 24, respectively. As the SEC deliberates, the crypto community watches closely, eager to see if the SEC addresses these hurdles or further delays the introduction of spot Ethereum ETFs to the market.
The growing uncertainty around spot Ethereum ETFs underscores the broader challenges the cryptocurrency industry faces with regulatory bodies. The complex nature of Ethereum’s staking mechanism, combined with the weak correlation between futures and spot markets, makes it a difficult task for the SEC to provide clear guidelines and approval for these financial products. As a result, the future of spot Ethereum ETFs remains uncertain, with many in the industry watching closely to see how these regulatory challenges will be addressed.
Investors and stakeholders in the cryptocurrency market should pay close attention to the SEC’s decisions in the coming weeks, as they will likely set important precedents for the approval of similar financial products in the future. The regulatory landscape for cryptocurrencies continues to evolve, and the outcomes of these decisions will have significant implications for the market.
In conclusion, the approval process for spot Ethereum ETFs is fraught with challenges, primarily due to the weak correlation between futures and spot markets and the complex nature of Ethereum’s staking mechanism. The SEC’s upcoming decisions will be critical in determining the future of these financial products and will likely have far-reaching implications for the cryptocurrency industry as a whole.
bitcoin, Ethereum, ETF, SEC, regulation
