Don’t hold your breath for an altcoin ETF

On May 23, the US Securities and Exchange Commission approved the first spot Ethereum ETFs, a significant milestone for the cryptocurrency market. But while it’s broadly a positive decision, it’s no outright win for the crypto community. 

The move follows the earlier approval of bitcoin ETFs in January. Taken together, the two approvals certainly seem to signal a shift in the regulator’s approach towards digital assets, which can only lead to greater adoption. 

However, the wait for other cryptocurrency ETFs is likely to be much longer than the wait for Ethereum’s. The SEC’s approval of Ethereum ETFs also represents a glimmer of a dawning, developing regulatory landscape that will prove hazardous for decentralization and its main exponents.

The reasons behind the change of heart 

The SEC could be said to have come to its senses. 

The decision to approve Ethereum ETFs appears to be based on market pressure and strategic considerations. The approval of Ethereum ETFs means that the SEC clearly recognizes that major cryptocurrencies like Ethereum and Bitcoin are becoming integral to the financial ecosystem — widely adopted, accepted and operating globally — which requires appropriate regulation from authorities rather than a brittle “protectionist” opposition. By shifting to this approach, the SEC can harness the sector’s dynamism while providing a structured environment to protect investors and maintain market integrity. 

The SEC’s regulatory framework for Ethereum ETFs provides improved investor protection through several key measures, principally comprehensive surveillance-sharing agreements with institutions like the Chicago Mercantile Exchange (CME), mandates for transparency in pricing and portfolio holdings and mandates for risk disclosures associated with cryptocurrency investments. These measures enhance investor safety in the cryptocurrency space.

The approval of Ethereum ETFs is likely also influenced by the need to maintain the US’s competitive edge in financial innovation. 

Cryptocurrencies and blockchain have the potential to drive significant economic growth, enhance security in critical industries, foster innovation via new business models like DeFi, and create new investment opportunities. By embracing crypto, the SEC can help the nation remain competitive.

One’s victory is another’s loss 

While at first glance the ETF’s approval seems like a clear win for crypto advocates, it also heralds an unwelcome tightening of regulations in many quarters. 

The SEC’s focus on fraud prevention and market integrity means exchanges and wallets, for example, could face increased scrutiny. This will force the difficult decision of complying with regulations or risking exclusion from the mainstream financial system.

Read more from our opinion section: FIT21 isn’t the crypto win you think it is

Consequently, achieving true decentralization becomes more challenging. Such platforms might soon have to choose between abandoning their principles or dealing with a stream of constant obstacles — namely, compliance burdens, increased costs and enhanced surveillance. Such challenges demand centralized oversight and data collection. Clearly, attempting to remain true to the principles of decentralization might lead to exclusion from mainstream finance, potentially capping the user base and liquidity for those decentralized platforms.

Under present Chair Gary Gensler, the SEC has consistently signaled a cautious, incremental approach driven by concerns around transparency, market integrity and investor safeguards. Despite the approval of the Ethereum ETF, a flurry of approvals for other altcoin ETFs — which would unlock significant growth potential for the industry and foster an environment of trust and compliance that benefits all stakeholders — is unfortunately highly unlikely in the near future, given the SEC’s cautious stance and ongoing concerns about market manipulation and investor protection. 

As Gensler said in a statement following the approval of bitcoin ETFs, “[this does not signal] anything about the Commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto asset market participants with the federal securities laws.

[T]he vast majority of crypto assets are investment contracts and thus subject to the federal securities laws. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”

In the end, the public decides the fate 

Despite the significance of the decision to approve an ETH ETF, the impact on the established crypto community itself will be relatively limited. There will always be those who favor the decentralized and anonymous nature of cryptocurrencies over regulatory compliance, and these purists are unlikely to shift towards ETFs. 

Ethereum ETFs will, however, attract a new wave of investors who were previously skeptical or hesitant about entering the market. I expect these new entrants to significantly increase market liquidity and drive broader adoption. 

But while the ETF’s approval signals a more open stance from the SEC, it also foreshadows regulatory challenges for many. The moment nevertheless represents a critical step towards integrating digital assets into traditional finance. 

Crypto’s fate now rests firmly in the community’s ability to navigate the evolving regulatory landscape and, as ever, the public’s willingness to embrace these new financial products.

Get the news in your inbox. Explore Blockworks newsletters:

• Blockworks Daily: The newsletter that helps thousands of investors understand crypto and the markets, by Byron Gilliam.
• Empire: Start your day with top crypto insights from David Canellis and Katherine Ross.
• Forward Guidance: Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin.
• 0xResearch: Get alpha directly in your inbox — market highlights, charts, degen trade ideas, governance updates, and more.
• Lightspeed: All things Solana, in your inbox, every day from Jack Kubinec and Jeff Albus.
• The Drop: The newsletter for crypto collectors and traders, covering games, tokens, apps, memes and more.