Coinbase, the United States-based cryptocurrency exchange, has recently expressed its support for Grayscale’s proposal to convert its Ethereum Trust into a spot Ether exchange-traded product (ETP). This backing came in the form of a detailed 27-page letter to the Securities and Exchange Commission (SEC) from Paul Grewal, Coinbase’s Chief Legal Officer, submitted on February 22.
In its submission, Coinbase laid out a comprehensive case for the approval of an Ether-based ETP, emphasizing Ethereum’s classification as a commodity. This argument is anchored in the approval of ETH futures by the Commodity Futures Trading Commission (CFTC), alongside statements from SEC officials and various court rulings. Importantly, the SEC has not contested the CFTC’s treatment of ETH as a commodity, a point Coinbase uses to bolster its position.
The letter is built around five key arguments, with a notable focus on asserting Ethereum’s status as a commodity. The stance on Ethereum’s classification as a commodity finds support in the regulatory framework and the market’s treatment of ETH. This perspective is reinforced by comments from Paul Grewal, who points to Ethereum’s governance model as a foundational element.
Coinbase also drew parallels between the regulatory approach to spot Bitcoin ETPs and the proposed Ethereum ETP. The exchange argues that the dispersed ownership and trading activity of Ethereum, along with its liquidity and the existence of ETH futures ETFs, demonstrate the market’s maturity and efficiency.
In addressing concerns over market integrity, Coinbase detailed Ethereum’s technological and operational security features that mitigate risks of fraud and manipulation. The exchange presented market data to illustrate Ethereum’s market depth, the tightness of spreads, and the uniformity of price across trading venues, arguing these are indicators of a market resilient to manipulation.
Furthermore, the letter highlighted its advanced market surveillance mechanisms and its agreement with the Chicago Mercantile Exchange (CME) as measures to ensure the integrity of Ethereum trading on its platform. This effort aligns with Coinbase’s response to NYSE Arca’s rule change proposal, which seeks to list and trade shares of the Grayscale Ethereum Trust as an Ethereum ETP.
Amidst this backdrop, S&P Global and JPMorgan have both highlighted concerns regarding the potential concentration risks within the Ethereum network due to spot Ethereum ETFs, especially those that include staking options. The involvement of major financial institutions like Ark Invest and Franklin Templeton could disrupt the balance among Ethereum validators, with Lido and Coinbase being identified as dominant players. These reports stress the importance of adopting diversified staking strategies to minimize centralization risks, which could threaten the network’s stability and integrity.
