Digesting the ETH ETF decision: What it means and what comes next

Spot ether ETFs are not launching today — and they might not hit the market any time soon.

But Thursday marked a win for crypto fund issuers, particularly considering how many expected the Securities and Exchange Commission to rule against such products just a week ago.

In case your internet has been down for the last 16 or so hours, the SEC approved rule changes submitted by the stock exchanges on which ether ETFs would list.

Fund groups now with a path to approval include VanEck, BlackRock, Fidelity, Grayscale, Bitwise, Ark Invest, Franklin Templeton and Invesco.

Some industry watchers also noted the apparent clarity the decision offers in terms of ether’s status as a commodity.

The agency greenlighting the so-called 19b-4 documents is a big step toward these funds launching, but not the only one. Next up, the SEC also needs to sign off on registration statements, known as S-1s, submitted by the fund issuers.

Some have attributed the potential delay between these two actions to the fact that the SEC’s 19b-4 approval appeared to reflect a rather sudden, politically motivated change of stance.

Whereas the agency’s Division of Trading and Markets ruled on the 19b-4, its Division of Corporation Finance handles the S-1 review.

Ramped-up engagement between the SEC and fund issuers this week indicates a possible SEC about-face that could signal the Corporation Finance unit is in catch-up mode.

Such conversations in the days leading up to the SEC’s decision deadline resulted in 19b-4 amendments on Tuesday and Wednesday clarifying that the US spot ether ETFs would not stake their holdings.

Put simply, ether ETFs are not cleared to launch, despite what might be out there in the ether (pun intended — we try to keep it light on Friday).

But it appears just a matter of time before such products are able to trade.

The next steps and when these could launch

The S-1 approval process is set to involve comments issued by the SEC and responses from fund issuers. While the SEC has a 240-day window to consider 19b-4 proposals, there is no specific deadline associated with the S-1 review.

A source familiar with the matter told Blockworks “it’s really hard to put odds on timing” of how it will play out, noting that the SEC’s corporation finance unit has not yet made its view clear on the ether ETF proposals.

The SEC did not immediately return a request for comment.

Bloomberg Intelligence analyst James Seyffart said in a Thursday X post he expects the process could take anywhere from two weeks to several months.

“Obviously this situation is nothing like anything that’s happened historically [in my opinion],” Seyffart added.

Fellow Bloomberg analyst Eric Balchunas indicated he believes it could take four to six weeks before we see an SEC comment letter related to the ether ETF S-1s.

The SEC’s Division of Corporation Finance had worked with prospective spot bitcoin ETF fund issuers on their S-1s for roughly three months before clearing those in January, Seyffart explained in a Friday X Space.

Katherine Dowling, general counsel at Bitwise Asset Management, noted in the same X Space that the SEC — when reviewing S-1s — is tasked with ensuring the proper disclosures are in place for the investing public.

There was consistent back-and-forth between the SEC and fund issuers on the spot bitcoin ETF S-1s, which resulted in a number of amendments prior to those funds being approved. Dowling said she expects the same with the ether products.

“Even though some of that groundwork will have been accomplished already through the spot bitcoin process, there are still differences,” the Bitwise executive added. “There are a number of additional risk disclosures, polishing, et cetera that will, and should, go on.”

While VanEck filed an amended S-1 late Thursday, it appears no other issuers have submitted one since the 19b-4 approval.

A person familiar with the filings told Blockworks they expect amended S-1s from the other fund groups to hit late next week. The SEC’s comments on those will be telling as to how long the process could take from there, the person added.

Another question has been the order in which these funds could launch, or if the full slate of proposed spot ether ETFs would ultimately come to market at once (as the SEC allowed with spot bitcoin ETFs).

VanEck first filed for a spot ether ETF in 2021 and re-upped that bid in September around the same time as Ark Invest and 21Shares. Other fund groups later followed suit.

“The commission believes that it is appropriate to approve all of the proposals at the same time in order to foster competition by potentially providing investors with several spot ether-based ETPs from which to choose,” the SEC’s Thursday 19b-4 approval order states.

Order proves ether is a commodity?

Some segment observers predicted that the SEC’s unclear stance on whether ETH is a security or commodity could prove a barrier to ether ETF approval.

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.”

SEC Chair Gary Gensler did not give a clear answer when asked if ETH was a security or a commodity during a House Financial Services Committee meeting in April 2023.

Variant Chief Legal Officer Jake Chervinsky noted earlier this week that SEC approval of spot ether ETFs would likely mean the agency does not view unstaked ETH a security, calling such a scenario “a major policy move.”

While the Thursday 19b-4 order does not explicitly detail the SEC’s stance on ether’s status as a commodity or security, the products are registered as commodity-based trust shares.

“Today’s approval signals that the SEC views that ETH is a commodity and not a security — contrary to the position it continued to take prior to the events of this week,” a Consensys spokesperson said in a statement.

Consensys, the company behind MetaMask, filed a lawsuit against the US securities regulator last month, claiming the agency seeks to regulate ETH as a security.

Despite welcoming the ether ETF 19b-4 approval, the Consensys representative pointed to the SEC’s continued “troublesome ad hoc approach to digital assets.”

“We will continue to fight for definitive regulatory clarity in our case and we are pleased to see the tremendous bipartisan Congressional effort seeking to provide clear and sensible regulation,” the spokesperson added.

Coinbase Chief Legal Officer Paul Grewal also pointed to what he interpreted as regulatory clarity within the 19b-4 order.

“ETH is effectively deemed a commodity as we’ve always known it to be,” Grewal said in an X post.

The SEC last year sued the crypto exchange — set to be a custodian for several of the planned spot ether ETFs — for allegedly engaging in unregistered securities offerings.

Coinbase noted the Thursday ether ETF 19b-4 approval in its latest request on Friday to file an interlocutory appeal.

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“These approvals enshrine the SEC’s position in 2018 — ETH is not a security,” said a16z crypto general counsel Miles Jennings. “That means the SEC has formally recognized that decentralization moves tokens outside of the US securities law regime.”

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