The US Securities and Exchange Commission (SEC) approved selling spot Ether Exchange-Traded Funds (ETFs) in the United States on May 23, 2024. These ETFs could have huge impacts on financial markets.
This is the SEC’s second judgment on cryptocurrency exchange-traded products. The SEC approved Bitcoin ETFs and ETPs earlier this year, in January 2024, following a lengthy struggle. The exchanges successfully obtained SEC approval for a regulation modification necessary to list these new goods. However, trading will begin after a period of time since issuers must still get SEC approval for individual ETF registration statements that include investor disclosures.
According to the regulator’s memo, the SEC approved the following applications: Grayscale Ethereum Trust, Bitwise Ethereum ETF, iShares Ethereum Trust (BlackRock), VanEck Ethereum Trust, ARK/21 Shares Ethereum ETF, Invesco Galaxy Ethereum ETF, Fidelity Ethereum Fund, and Franklin Ethereum ETF.
When Will Spot Ethereum ETF Start Trading?
JPMorgan predicted that trading in recently approved spot Ethereum ETFs will commence before November owing to political concerns, notably ahead of the 2024 US presidential election. A total of 8 ETFs were approved in a single mass order, but S-1 filings are still pending SEC approval.
The SEC approved amendments requested by Ethereum ETFs on Monday, but the S-1 documents were not required for trading approval. This differs from the decision made in early January, which was tradable the following day. The approval of S-1 documents could take weeks or months, but Bloomberg analysts consider it a formality and believe it could go faster in this case.
The Controversy Surrounding Staking Continues
The SEC’s approval of ETH ETFs after months of consultation with stakeholders. The approval of spot Ethereum ETFs was most likely due to issuers removing staking-related material from their 19b-4 forms. Staking is a difficult subject between fund issuers and the SEC, as it is unclear whether an issuer staking ETH on behalf of an ETF investor constitutes an investment contract and security under the Howey test.
The regulatory approval of a new issuer’s staking incentives has been affected by changes to current applications that remove references to such awards. But the discussion over staking continues, with the focus now on whether issuers may keep such benefits for themselves.
Political Issues Behind the Ethereum ETF Approval
The acceptance of the Ethereum ETF has resulted in a significant shift in regulatory opinion; up until this week, the market had not priced in the product’s approval shortly, but that has all changed with a few tweets. The first one came from Eric Balchunas, Senior ETF Analyst at Bloomberg.
The following 20% surge in Ethereum caught some market participants off guard, compounding the move into a rapid rally on late Monday. After stabilizing in a newly created range following the announcement, the same source sent another bomb tweet highlighting a recent development on Thursday morning.
A bipartisan group of House legislators, including Majority Whip Tom Emmer and New Jersey Democrat Josh Gottheimer, has written to SEC Chair Gary Gensler requesting that he approve spot Ether ETFs and other digital asset ETFs.
The letter encourages SEC Chairman Gensler to apply the criteria to approve Bitcoin ETPs to Ethereum ETP applications, claiming that the legal issues are the same. Despite substantial liquidity shocks, the next U.S. election and a supportive Congress regarding new crypto laws may usher in the industry’s next growth phase. Despite Gensler’s criticism, cryptocurrencies have been established as viable investment instruments.
FIT21 Bill Explained
House Democrats and Republicans have approved FIT 21, legislation that seeks to designate cryptocurrencies as securities and subject them to SEC regulatory monitoring. The measure will be overseen by the CFTC if the blockchain utilized in a cryptocurrency is functioning and decentralized; otherwise, controlled blockchain networks would be classified as securities and subject to harsher SEC monitoring.
Despite opposition from SEC Chair Gary Gensler, who stated that regulatory loopholes are to be expected, FIT 21 was approved with 71 Democrats and 208 Republicans. Gensler underlined that investor issues stem mostly from violations of established standards, not regulatory uncertainty.
Democrats Broke Ranks on SAB 121
SAB 121 was released on March 31, 2022, by the SEC’s Office of the Chief Accountant. It provides “interpretive guidance” for SEC reporting organizations that hold crypto-assets in custody on behalf of customers to represent such risk on their balance sheets. This is a dramatic change from decades of widely accepted off-balance-sheet accounting for custody assets.
Banking associations have urged the SEC to make specific changes to SAB 121 to meet the issues it brings to U.S. banking firms. The suggested amendments include exempting well-managed institutions from on-balance-sheet treatment and refining the term “crypto-assets” to explain the exclusion of specific asset categories and use cases.
Just a week before the ETF U-turn, the Senate voted on an SEC accounting proposal, SAB 121. This idea would put rigorous requirements on banks and other organizations that retain cryptocurrencies for consumers. However, it has been criticized for preventing corporations from taking custody of digital assets, which would negatively affect the cryptocurrency sector.
However, the Senate voted 60 to 38 in favor of repealing SAB 121. Several Democrats, including Senate Majority Leader Chuck Schumer, broke ranks with President Biden and Senator Elizabeth Warren, who are publicly opposed to cryptocurrency, to take what is effectively a pro-crypto stance.
SEC’s Points of Concern
In its fast clearance, the SEC primarily focused on the following aspects:
Fraud and Manipulation Prevention
The SEC has underlined the need for extensive surveillance-sharing arrangements with the Chicago Mercantile Exchange (CME) to detect and discourage fraud and manipulation. The CME, through its Intermarket Surveillance Group, manages such contracts.
However, the CME does not monitor spot ether markets, raising worries about effective governance and fraud detection. Given the tight connection between the two, price manipulations in the spot market may impact the futures market.
Exchanges submitted correlation analyses to establish whether price movements in the CME ether futures market are consistent with those in the spot ether markets. This measures the efficiency of CME’s futures market monitoring in detecting and deterring fraud and manipulation in spot ether markets.
The SEC conducted a correlation analysis on CME ether futures and spot ETH/USD trading pairs on major platforms (Coinbase and Kraken) from October 1, 2021, to March 29, 2024. Based on hourly, five-minute, and one-minute price data, the analysis revealed a consistently high correlation between the CME ether futures market and this subset of the spot ether market over the past 2.5 years.
Conclusion
The U.S. Securities and Exchange Commission (SEC) has approved spot Ether Exchange-Traded Funds (ETFs), marking a significant shift in regulatory attitudes toward cryptocurrency exchange-traded products. Following the approval of Bitcoin ETFs and ETPs in January 2024, this decision signifies a growing institutional acceptance of digital assets.
The expected commencement of Trading before November 2024, driven by political considerations, underscores the importance of this development. The rapid market reaction, including a surge in Ethereum’s value, reflects changing regulatory perspectives and the growing bipartisan support for these products. This approval could pave the way for broader acceptance and integration of digital assets into mainstream financial markets.
