It should come as no surprise that the U.S. Securities and Exchange Commission (SEC) is not jumping on the ether (ETH) exchange-traded fund (ETF) bandwagon. Yesterday, the agency punted on BlackRock's ETH ETF proposal, filed initially in November, a few months after the asset manager unexpectedly decided to try to launch a spot bitcoin fund.
"The Commission finds it appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change and the issues raised therein," according to the SEC's report. It used nearly identical language last week, when also delaying the Fidelity Ethereum Fund.
This was the decision most market analysts predicted. A JP Morgan (JPM) analyst put the odds of the SEC approving an ETH-based ETF by May at no more than 50%, in a recent report. Bloomberg's seasoned ETF expert James Seyffart said delays for spot ether ETF proposals will likely "continue to happen sporadically" over the next few months.
So what exactly needs to happen for an ETH ETF to go to market? The situation seems even less cut-and-dried than the case for bitcoin ETFs, which recently went live after much dillydallying by the SEC. For years, the SEC hesitated approving bitcoin funds over fears of potential market manipulation.
BlackRock, the world's leading ETF issuer and largest asset manager, was the first to devise an exchange surveillance protocol to appease those fears, and the 11 ETF issuers also made several major concessions to the regulator — like settling in cash, rather than bitcoin — when seeking its approval.
Ultimately, though, it was Grayscale's court victory that forced SEC Chairman Gary Gensler to approve the bitcoin-based financial products. An appellate judge criticized the agency's crooked logic in earlier approving futures-based ETFs but not spot-based ones, and required it to reevaluate its listing standards.
It might be a good sign, then, that ETH futures ETFs are already live. However, in his public announcement, Gensler said the decision to approve bitcoin ETFs "should in no way signal the Commission's willingness to approve listing standards for crypto asset securities."
SEC Commissioner Hester Peirce, the most pro-crypto U.S. regulator, told Coinage recently that the SEC isn't looking to go to court over ETH ETFs, and said it would "apply precedent" as it makes its decisions. Peirce often breaks with her commission colleagues, and makes public statements criticizing the agency's many legal challenges brought against crypto firms and projects.
In a scathing public statement following Gensler's bitcoin ETF announcement, Peirce said the agency "squandered a decade of opportunities to do our job" in an "unnecessary, but consequential, saga" that kept in-demand products from investors and "has driven retail investors to less efficient means of attaining Bitcoin."
Although Peirce now suggests the SEC and Gensler have internalized the lesson, and will therefore not shift the "goalposts" like what happened to bitcoin ETF applicants, she is hesitant to "predict what will happen with any particular" crypto product. In the Coinage interview, she noted it takes "a lot of work" to get ETFs ready for market, and that the "facts and circumstances" do matter.
Bitcoin was in a better position for approval because it's the only crypto asset regulators uniformly classify as a commodity. Breaking with earlier regulators who said Ethereum was "sufficiently decentralized," Gensler has raised concerns over ETH, particularly after the network shifted to a staking mechanism.
"The ongoing lawsuits by the SEC against crypto exchanges offering staking services for proof-of-stake blockchains including Ethereum, make a spot ether ETF approval more challenging at least until these lawsuits are resolved," JP Morgan analyst Nikolaos Panigirtzoglou wrote.
Panigirtzoglou also noted the SEC hasn't directly mentioned ETH in its lawsuits against crypto exchanges Kraken, Coinbase or Binance over alleged securities law violations, indicating it might actually classify the cryptocurrency as a commodity. Further, if the SEC opened a fight over ETH ETFs, it may have to contend with the Commodity Futures Trading Commission, a sibling rival regulatory body that has also claimed jurisdiction over ETH.
All this together suggests that ETH ETFs are inevitable, and yet there are still many obstacles ahead.
Although the SEC's delaying action here is keeping U.S. consumers from accessing a safe, tax-advantaged way of gaining exposure to the second-largest cryptocurrency, it may ultimately work out in ETH's favor. Peirce has said multiple times that, by challenging bitcoin ETFs, the SEC indirectly induced demand by creating an "artificial frenzy" around the products.
"Congress did not authorize us to tell people whether a particular investment is right for them," she said, "but we have abused administrative procedures to withhold investments that we do not like from the public."
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– D.K.
@danielgkuhn
daniel@coindesk.com
