Ether ETFs coming in May? Here’s why many are bearish

While there is consensus that US spot ether ETFs are coming, most industry executives agree regulatory deliberation is set to stall approvals in the near term.

The Securities and Exchange Commission is expected to rule on such product proposals by May 23 after delaying their decision on several of the applications.

“I’m 100% sure that it gets approved; I’m not 100% sure when,” CoinFund president Christopher Perkins told Blockworks. “It’s a travesty that we don’t have more regulatory certainty beyond that.”

When the SEC approved spot bitcoin ETF products in January, Chairman Gary Gensler said in a statement the action was “cabined to ETPs holding one non-security commodity, bitcoin.”

The approval, Gensler added, was “the most sustainable path forward” in part due to the SEC’s court loss to Grayscale Investments last August.

Grayscale CEO Michael Sonnenshein said during a Tuesday panel at Blockworks’ Digital Asset Summit in London that the crux of that lawsuit was that there is “an inextricable tie” between the regulated bitcoin futures market and the spot market.

The SEC approved bitcoin futures ETFs, thus it was unfair to deny spot BTC products, the argument went. Grayscale notched a legal victory, and 10 spot bitcoin ETFs have traded on US markets for the last 10 weeks.

The US securities regulator allowed ether futures ETFs to start trading in October — a fact various industry watchers point to when arguing spot ether ETFs are inevitable.

Those funds, like the bitcoin futures ETFs, hold futures contracts traded on the Chicago Mercantile Exchange (CME), which is regulated by the Commodity Futures Trading Commission.

“What we’ve seen now is a very similar if not even stronger series of data for correlations between the regulated market for Ethereum…and the spot Ethereum market,” Sonnenshein said. “It’s just a question of whether or not, by this May when the SEC has this first deadline, whether the data in front of them will actually be convincing enough.”

SkyBridge Capital founder Anthony Scaramucci thinks not.

“Maybe by the end of the year, but very unlikely in May,” he said during a Wednesday panel at DAS when asked about ether ETF approval. “It has to happen, but [Gensler’s] going to do things to delay it.”

Bloomberg Intelligence analyst James Seyffart said the SEC’s lack of engagement with issuers thus far seems to point to denials in May.

Bitwise Chief Investment Officer Matt Hougan said on the panel with Sonnenshein that the SEC waiting a bit longer to approve ether ETFs could have a silver lining.

He argued that such funds would gather more assets if they launch toward the end of the year, rather than in May.

“Wall Street and traditional finance just started ingesting this giant thing called bitcoin,” Hougan said. “They’re just getting their hands around it, and I think you need to give them longer to digest.”

A new ruffle to the ether ETF decision?

Some of these takes from industry executives came before a report by Fortune that the SEC had subpoenaed several US companies related to their dealings with the Ethereum Foundation, a group that oversees the Ethereum blockchain.

Though Blockworks has not confirmed the report, the Ethereum Foundation “received a voluntary enquiry from a state authority that included a requirement for confidentiality,” according to Ethereum web developer Pablo Pettinari.

Mike Selig, partner at Willkie Farr & Gallagher, said in an X post that it’s “extremely common for crypto protocol foundations to receive voluntary requests for information from federal and state regulators.”

Still, the possible probe has renewed a question dating back years: Is ether a security or a commodity? This question would impact how the SEC approaches its ruling on ether ETFs, segment observers have noted.

While the CFTC has labeled ether as a commodity, Gensler has not historically given a clear answer when asked about ETH’s status.

In a 2018 speech, William Hinman, then-director of the SEC’s division of corporation finance, said “current offers and sales of Ether are not securities transactions.”

In a series of posts on X, Coinbase Chief Legal Officer Paul Grewal said that the SEC “has no good reason” to reject the spot ether ETF applications.

“And we hope they won’t try to invent one by questioning the long established regulatory status of ETH, which the SEC has repeatedly endorsed. That’s not how the law works. And Americans deserve better.”

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Brian Quitenz, global head of policy at a16z crypto and former Commissioner of the CFTC, said — also on X — that the SEC “explicitly acknowledged” ETH as being “a non-security and outside of its jurisdiction” when approving ether futures ETFs.

“It will be interesting to watch what, if any, excuse the SEC uses if it were to delay or deny an ETH ETF given it has already informed the market on ETH being outside its jurisdiction,” he added.

ETH ETFs may have to wait to stake holdings

Prospective spot ether ETFs have added language to their applications about staking the assets they hold.

Staking ether is the process of depositing ETH to help secure the Ethereum blockchain — and earning yield on that ETH for doing so.

An amended proposal by Ark Invest and 21Shares last month, for example, notes that the sponsor “may, from time to time, stake a portion of the trust’s assets through one or more trusted staking providers.”

Fidelity and Grayscale added similar language to their proposals earlier this week.

Gemini Chief Operating Officer Marshall Beard said he thinks it could take another six to nine months before the SEC greenlights spot ether ETFs.

And ether ETFs that stake assets are “not going to be version one,” he added.

Gemini, already a custodian for VanEck’s spot bitcoin ETF, is in discussions related to the proposed ETH funds.

“There’s a lot of complications to work through on the regulatory side and on the operations and technical side,” Beard told Blockworks.

ETF.com senior analyst Sumit Roy agreed it’s hard to imagine the SEC allowing potential ether ETFs to stake their holdings.

He added: “Staking is a feature that makes ether and other proof-of-stake cryptocurrencies more like securities, which the SEC won’t look favorably upon.”

Updated March 21, 2024 at 3:42 pm ET: Modified headline.

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