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Spot Ethereum ETFs Approved – But SEC Registration Could Mean “Weeks to Months” Before Trading

Last Updated May 24, 2024 8:25 AM
Teuta Franjkovic
Last Updated May 24, 2024 8:25 AM

Key Takeaways

  • The SEC has approved Ethereum ETFs, but trading awaits final registration statement approvals.
  • Ethereum’s classification as a commodity could simplify regulation and attract investors, but also raises concerns about arbitrage and lack of staking rewards in ETFs.
  • Hong Kong is considering staking options for Ethereum ETFs, potentially outpacing the US in crypto innovation.

On May 23, the US Securities and Exchange Commission (SEC) approved  the sale of spot Ether Exchange-Traded Funds (ETFs) across the United States, following combined proposals from major exchanges like Nasdaq, NYSE, and CBOE.

However, these exchanges have requested amendments to current regulations to facilitate the trading of Ethereum Exchange-Traded Products (ETPs) and ETFs, meaning trading has not immediately commenced.

Moreover, the SEC and issuers like BlackRock and Fidelity still have some bureaucracy to work through, meaning trading could be months away.

SEC Approves Ethereum ETFs, Trading Awaits Final Registration

This marks the SEC’s second approval of crypto exchange-traded Products, with Bitcoin ETFs and ETPs receiving the green light earlier in January 2024 after extensive deliberations. Despite this milestone, trading of the new Ethereum-based products won’t commence immediately, as issuers are still required to obtain SEC approval for individual ETF registration statements that detail disclosures for investors.

The SEC has approved the 19b-4 forms for Ethereum ETFs, including offerings from major financial institutions like BlackRock, Fidelity, and Grayscale . However, for trading to commence, the S-1 registration statements associated with these products need to become effective.

Notably, when the SEC approved Bitcoin ETFs, the corresponding S-1 forms were prepared in advance of the 19b-4 approvals, allowing them to become effective almost immediately. This preparation enabled trading to begin just one day after the S-1 forms were approved.

Ethereum Is a Commodity – The Positive Side of Things

Classifying Ethereum as a commodity changes things significantly. Firstly, it places Ethereum under the jurisdiction of the CFTC, leading to more consistent regulatory guidelines. This shift reduces the regulatory uncertainty that previously deterred some institutional investors, thereby encouraging broader participation in the Ethereum market. It also paves the way for new financial products like Ethereum futures and options, enhancing market liquidity and stability.

A significant development influencing Ethereum’s classification as a commodity was the approval of an Ethereum Exchange-Traded Fund (ETF). ETFs, which are investment funds traded on stock exchanges similar to stocks, hold various assets and typically operate with an arbitrage mechanism designed to keep trading close to their net asset value. In the case of Ethereum, the ETF provided a regulated and familiar investment vehicle for both institutional and retail investors. The prior approval of Bitcoin ETFs in the US, designated as commodity ETFs, set a precedent.

The approval and successful launch of an Ethereum ETF have bolstered arguments for its classification as a commodity. This ETF underwent rigorous scrutiny, ensuring compliance and security measures were in place, further validating Ethereum’s status as a stable and mature asset class.

Recognizing Ethereum as a commodity not only clarifies its regulatory status but also enhances its appeal to a broader range of investors. With clear regulatory guidelines, institutional interest in crypto has grown, driven by portfolio diversification and hedging against inflation. This recognition also spurrs innovation within the Ethereum ecosystem, as developers and businesses can embark on more ambitious projects without fear of unexpected legal repercussions, accelerating the development of decentralized applications (dApps) and smart contracts.

Ethereum Is a Commodity – The Negative Side of Things

First and foremost it is important to remind that back in 2022, Ethereum transitioned from the energy-intensive, computation-driven Proof-of-Work (PoW) mining method to a financially-governed Proof-of-Stake (PoS) mechanism. This change not only promotes ecological sustainability but also provides stakers with several benefits including passive income, contribution to network security, influence over governance, and potential for capital appreciation.

Peter Eberle, President and Chief Investment Officer at Castle Funds, highlighted  that the lack of a staking option in Ether ETFs might dampen their appeal since staking Ether can yield about 3.5% annually, as per the Ethereum Foundation. “For someone who is a long-term holder, that makes a big difference,” Eberle stated, pointing out that Bitcoin ETFs do not face this disadvantage due to Bitcoin’s proof-of-work consensus mechanism, which involves miners securing the blockchain by solving complex mathematical problems.

Eberle further expressed skepticism  about the institutional demand for Ethereum ETFs, noting that the high correlation in price movements between Ethereum and Bitcoin provides little incentive for institutions to invest in Ethereum ETFs if they already hold Bitcoin ones.

Additionally, Matt Ballensweig, Head of Go Network at BitGo, suggested  that the absence of a staking option could lead to arbitrage opportunities, where traders might stake their Ethereum directly for returns while simultaneously shorting the Ethereum ETFs.

Staking Removal Could Be a True Problem

Several prominent entities aspiring to launch Ethereum ETFs, such as Ark Investments Management  and Fidelity Investments , have decided to omit staking features from their proposals due to regulatory pressures from the SEC.

This strategic shift was, of course, the way to enhance the likelihood of obtaining approval for their Ethereum ETFs. However, this move has sparked concern and debate within the cryptocurrency industry about the implications of excluding staking —a process where cryptocurrencies are locked up to validate transactions in exchange for rewards.

Staking is highly valued by many investors for the yield it generates, and its absence in Ethereum ETFs could significantly diminish their attractiveness compared to direct purchases of Ethereum, where investors can engage in staking activities.

A member of the X community shared their perspective  on the removal of staking from Ethereum ETFs, suggesting that the decision was influenced by the price disparity between Ethereum and Bitcoin. She posited that regulatory bodies might have requested the removal of staking features to manage issues related to the pricing differences between the two cryptocurrencies.

Responding to the discussion, another member of the X community compared  staking to “earning interest on your savings,” suggesting that this functionality places staking squarely under the “securities umbrella” from a regulatory standpoint.

Steven Lubka, Managing Director at Swan Bitcoin and Head of Swan Private, mentioned  that the absence of staking in ETF products could be a key factor in why Ether ETFs might experience lower demand compared to Bitcoin ETFs.

He said :

“These numbers are not going to match the Bitcoin ETF inflows, and there are some structural differences in the product that just make it less attractive overall.”

Hong Kong Considers Staking Options for Ethereum ETFs, Potentially Outpacing US in Crypto Innovations

Hong Kong is exploring the possibility of allowing staking services  for ETFs that invest directly in Ethereum, which could provide a new source of passive income previously unavailable in US plans. The city’s Securities and Futures Commission is currently in discussions with local crypto ETF issuers about the potential for offering staking through licensed platforms, based on recent proposals. These talks are still in progress and a definitive timeline for a decision has not been established, according to sources  who preferred to remain anonymous due to the private nature of the information.

If Hong Kong approves staking for these ETFs, it could significantly boost demand for the city’s spot-crypto ETFs, which have experienced only moderate interest since their introduction in April. Furthermore, this move could position Hong Kong as a leader in the global finance sector, especially compared to the U.S., where there has been recent progress toward approving spot-Ether ETFs, but without the inclusion of staking options.

 

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