As the market for digital assets continues to grow, investors are looking for new ways to gain exposure to cryptocurrencies. Spot Ether exchange-traded funds (ETFs) could be an easy way for crypto enthusiasts to benefit from the price movements of Ether, the largest cryptocurrency by market capitalization after Bitcoin.
Almost immediately after the historic approval of spot Bitcoin ETFs by the US Securities and Exchange Commission (SEC) on January 10, the discussion turned to the possibility of spot ETFs for other cryptocurrencies, with Ethereum being a prime candidate.
On January 12, Blackrock (NYSE:BLK) CEO Larry Fink said during an interview with CNBC that he saw “value” in offering spot ETFs for Ethereum. “These are just stepping stones towards tokenization,” he said.
However, despite the demand for spot Ether ETFs, the SEC’s position on approving them has remained ambiguous.
Due to the potential for Ethereum’s underlying crypto asset to be classified as a security, the approval process has not been as straightforward as Bitcoin’s was, which is saying something — spot Bitcoin ETFs were only approved after years of litigation.
What is Ethereum?
Ethereum is a decentralized open-source blockchain platform. While Bitcoin legitimized the concept of peer-to-peer (P2P) digital money, Ethereum expanded on the idea. The platform enables software developers to create decentralized applications that run on the blockchain — called dApps — and smart contracts, which are self-executing agreements with the terms directly written into code. The network also supports a digital currency called Ether (ETH), which is used to pay for transaction fees and computational services on the Ethereum network.
The Ethereum Virtual Machine is a runtime environment that uses smart contracts for various applications on the Ethereum blockchain. Some popular use cases for smart contracts on Ethereum, as well as other platforms such as Solana and Cardano, include decentralized finance, non-fungible tokens (NFTs), gaming, decentralized autonomous organizations, digital wallets and gambling.
Ethereum has undergone several changes to its network since its inception, each aimed at improving scalability, security and functionality. The Merge, the Shanghai Upgrade and the Dencun Upgrade, which took place in September 2022, March 2023 and March 2024 respectively, have all made significant changes to its operation.
The Merge marked Ethereum’s transition from a proof-of-work (PoW) consensus mechanism, which is how Bitcoin operates, to a proof-of-stake (PoS) mechanism, which requires validators to put up some of their own Ether as a stake in the network’s consensus process. It involved merging the Ethereum mainnet with the PoS based Beacon Chain, a separate blockchain in which users can deposit the 32 Ether required to become validators.
The Shanghai Upgrade in 2023 enabled the withdrawal of staked Ether from the Beacon Chain, which wasn’t initially possible following the Merge. Several Ethereum Improvement Proposals were included in this upgrade, laying the groundwork for future progress and resulting in enhanced network functionality and performance.
The most recent upgrade, Dencun, introduced a new process to lower energy consumption and fees for Layer 2 networks operating on the Ethereum blockchain. In fact, transaction fees on leading Layer 2 networks dropping significantly in the aftermath of the Dencun upgrade may have laid the groundwork for increased investor interest in Ethereum-based financial products.
What is an Ethereum ETF?
An ETF is a type of investment fund that holds a collection of underlying assets and trades like an individual stock on an exchange, giving investors exposure to the performance of a particular market, commodity or asset class without requiring them to invest directly in it.
In this case, Ethereum ETFs track its cryptocurrency Ether’s financial performance and allow investors to use traditional, regulated stock exchanges to benefit from Ether’s price movements. This means they can avoid complicated technical processes like setting up and managing cryptocurrency wallets, navigating decentralized exchanges or understanding underlying blockchain technology.
Cryptocurrency ETFs can also offer a more cost-effective way to invest compared to purchasing tokens directly. This makes them an attractive option for risk-averse investors who are interested in the crypto market but have concerns about volatility and security.
Spot ETFs and futures ETFs are the two distinct types of ETFs that differ primarily in the way investors gain exposure to underlying assets. Spot ETFs hold the underlying assets they aim to track, while futures ETFs do not. Instead, futures ETFs gain exposure by tracking the price of futures contracts, which are financial derivatives that represent an agreement to buy or sell an asset at a predetermined price and date in the future. Futures ETFs tend to carry additional risks, such as price discrepancies between futures and spot markets.
Ethereum futures ETFs have been available since the VanEck Ethereum Strategy ETF, the Bitwise Ethereum Strategy ETF and the ProShares Ether Strategy ETF made their debut on October 2, 2023. Due to the volatile nature of cryptocurrencies, investor sentiment has shown a strong preference for spot ETFs over futures-based ETFs, but spot ETFs for Ethereum have not yet been approved by the SEC.
The debate over Ethereum’s classification
The debate on how to classify cryptocurrencies is at the center of the dispute between the regulatory agency and the cryptocurrency sector.
In 2018, William Hinman, who served as the Director of the SEC’s Division of Corporation Finance from 2017 to 2020, classified Bitcoin and Ether as non-securities on the grounds that their decentralized nature, as well as their functional characteristics used for storing value and conducting transactions, didn’t meet the definition. Since then, Gary Gensler, who took over Jay Clayton’s role as SEC chairman in 2020, has argued that cryptocurrencies meet the definition of securities, which would subject them to more stringent regulations.
In contrast, the Commodity Futures Trading Commission has classified crypto as a commodity, which would place it under a different regulatory regime. Many contend that cryptocurrencies don’t neatly fit into existing regulatory categories, a position that Gensler disagrees with.
In an article for Coin Telegraph in January, Lucas Kiely, chief investment officer of Yield App, wrote that the justifications for the SEC’s decade-long fight against a Bitcoin ETF were nothing short of political. With the recent approval of a spot Bitcoin ETF, Kiely asserted that the SEC has now settled the debate over crypto’s classification as a commodity. He contended that there should be no reason to delay the approval of Ethereum ETFs, given the similarities between Bitcoin and Ethereum in terms of their decentralized nature and widespread adoption.
Kiely’s argument raises a question about the consistency of the SEC’s approach to cryptocurrency classifications. If the SEC has provided clear guidance on classifying Bitcoin as a non-security, it would seem logical that this classification could also apply to Ether.
However, the approval of spot Bitcoin ETFs depended on the SEC allowing specific rule exceptions to be made, instead of reclassifying Bitcoin as a security. The rule change was not automatically extended to other cryptocurrencies, and SEC Chairman Gensler indicated that the agency would take a case-by-case approach in evaluating ETF proposals for other cryptocurrencies.
Additionally, there are several differences in the function of the two cryptocurrencies. Bitcoin is primarily seen as a decentralized digital currency, whereas Ether is tied to Ethereum’s blockchain platform, smart contracts and dApps, leading to classification complexity. Ether’s use as a working currency, unlike Bitcoin’s primary function as a store of value, may pose additional challenges.
Which firms have applied to offer spot Ethereum ETFs?
Eight institutions are awaiting SEC approval for spot Ether ETFs: BlackRock, VanEck, ARK 21Shares, Grayscale, Fidelity, Invesco and Galaxy Digital through a joint proposal, as well as Franklin Templeton, which is the most recent financial firm to apply, having done so in February.
VanEck was the first institution to file in July 2021, but the SEC has repeatedly delayed deciding on its spot Ether ETF application and others on multiple occasions. Cboe Digital, the cryptocurrency arm of Cboe Global Markets and one of the few US exchanges approved to offer margined Bitcoin and Ether futures, submitted VanEck’s most recent application, along with the proposal on behalf of ARK 21Shares, on September 6, 2023.
Also in September, shortly before also applying for spot ETH ETFs, Grayscale applied to offer futures Ether ETFs, a move some analysts believed was strategic, meant to strongarm the SEC into approving spot Ether ETFs. Grayscale’s subsequent application to convert its Ethereum trust into a spot Ether ETF in October 2023 caused shares to jump 6.15 percent, indicating demand.
SEC regulators announced just days before the original December 26 deadline that they would postpone the decision for VanEck’s spot ETF and Grayscale’s Ethereum Futures ETF applications until May 23, wth Graysclae’s being pushed again to June 23, citing the need for further consideration of the complex regulatory issues involved. Other spot Ether ETF applications that have been delayed are the ARK 21Shares Ethereum ETF and the Hashdex Nasdaq Ethereum ETF, an ETF that was created through a collaboration between Brazilian asset manager Hashdex and the Nasdaq stock exchange.
Recently, representatives from Coinbase met with the SEC to present Grayscale’s proposal, hoping to sway the regulators in their favor. During the meeting, Coinbase said it has partnered with the Chicago Mercantile Exchange to closely monitor trading activities for fraud and manipulation. They have agreed to share information to ensure transparency and regulatory compliance.
Will the SEC approve spot Ethereum ETFs?
Early on in 2024, analysts predicted that Ether ETFs would have a “clear path” to approval following the sweeping approval of 11 spot Bitcoin ETFs. At that time, the odds of a spot Ethereum ETF by May were pegged at 70 percent by Bloomberg ETF analyst Eric Balchunas, who later reduced his estimate to 35 percent on March 11.
“All the signs/sources that were making us bullish 2.5mo out for BTC spot are not there this time,” he posted to X, the social media platform formerly known as Twitter.
He isn’t the only one reigning in expectations. FOX reporter Eleanor Terrett had tweeted a day prior that optimism surrounding approval is “waning” amidst one-sided talks between issuers and the SEC and opposition from a group of lawmakers who want the SEC to halt crypto ETF approvals. Despite these challenges, some reacted to the 21-day public comment period commenced by the SEC on April 2 with optimism. However, Bloomberg ETF analyst James Seyffart was quick to curb enthusiasm, pointing out that the SEC was merely following standard procedure.
“Every single 19b-4 ETF filing goes through the same process (whether approved or denied). It’s not ‘bullish’ in any capacity for Ethereum ETFs,” he posted on April 3.
The most recent development happened on May 20, when CoinDesk and Reuters reported that the SEC asked the Nasdaq, CBOE and NYSE to update their 19b-4 filings for the ETH ETF applications “on an accelerated basis.” The price of Ether jumped from US$3,143 to US$3,472 in just over 20 minutes following the news breaking.
With this recent development, many analysts are more optimistic that Ether ETFs will be approved. Eric Balchunas and James Seyffart increased their odds of VanEck’s 19b-4 form being approved — a crucial step in the process of launching a spot Ether ETF — from 25 percent to 75 percent.
A litigation process could reverse the regulator’s decision even if the SEC rejects the applications. Nikolaos Panigirtzoglou, a managing director and global market strategist at JPMorgan, told the Block that even if the SEC does reject the pending applications, the regulator is unlikely to win any legal battle brought to it by these financial institutions. Notably, exchanges would also need S-1 applications approved, a process with no set timeline, meaning it could still take months for spot Ether ETFs to begin trading.
“We believe that the most likely scenario is that the SEC eventually loses this litigation (similar to what happened with the Grayscale and Ripple legal battles last year), which means that eventually, the SEC will approve spot Ethereum ETFs (but not as soon as this May),” he said.
The regulators have also been tight-lipped regarding any progress made, a noticeable deviation from their more open dialogue in the weeks leading up to the approval of spot Bitcoin ETFs. Since the meeting with Coinbase on March 6, the SEC has not provided any updates on an Ether ETF approval. Additionally, there has been less media coverage compared to the nearly daily updates of the Bitcoin ETFs approval process.
X user @chiefingza posited that the lack of intense media coverage might be due to the similarity of the Ether ETF story to that of the Bitcoin ETF, causing a sense of news fatigue among outlets and the public. Furthermore, they argued that the exact date of approval, whether in May or later, is less important than the fact that it will happen eventually, as the crypto industry continues to mature and gain mainstream acceptance.
Importantly, as reported by Bloomberg, analysts at Standard Chartered have predicted that Ether will likely not experience the immense selloffs that Bitcoin experienced in January. When Grayscale’s Bitcoin Trust was converted to a Bitcoin ETF, holders were able to make redemptions, leading to a significant outflow that resulted in a 20 percent drop in the price of Bitcoin. Grayscale’s Ethereum Trust holds far less of Ether’s market cap, making it less prone to significant losses from a sell-off than Bitcoin was.
What is the Ether ETF approval date?
The deadlines for the decisions on the VanEck and ARK Invest 21Shares Spot Ether ETFs are May 23 and May 24, respectively. A decision for a spot ETH ETF offered by Franklin Templeton is due on June 11, while Grayscale Investments Ether ETF application has a deadline of June 23.
News that the SEC asked multiple exchanges hoping to list spot Ether ETFs to update their 19b-4 filings “on an accelerated basis” caused both optimism and the cryptocurrency’s price to soar on May 20, but approval is not guaranteed.
Investor takeaway
In January, financial services company Standard Chartered predicted that the price of Ether would reach US$4,000 by the approval deadline of May 23, a price it has not seen since December 2021. It has since surpassed that landmark, going as high as US$4,070 on March 11, according to data gathered from CoinGecko.
Ether’s price had cooled to just below US$3,000 as of mid-May. However, fresh optimism around the upcoming spot ETH ETF approval decision has caused Ether’s price to surge from its May 19 price of US$3,070. As of 1:30 p.m. PDT on May 21, Ethereum was valued at US$3,741 per ETH.
Given Ethereum’s recent price momentum and the anticipation surrounding the SEC’s upcoming decision on spot Ethereum ETFs, investors and market observers are closely watching to see how these factors might influence the future growth and mainstream adoption of the world’s second-largest cryptocurrency.
Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.
