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Coinbase Makes Case for Approval of Ether ETFs in Formal Letter to SEC

Coinbase has thrown its weight behind Grayscale’s endeavor to transform its Ethereum (ETH) Trust into a spot Ether exchange-traded product (ETP).

In a comprehensive 27-page letter released on February 22, Paul Grewal, Coinbase’s chief legal officer, delineated the legal, technical, and economic grounds for the Securities and Exchange Commission (SEC) to greenlight an Ether-based ETP.

A central argument put forth by Coinbase is the classification of Ether as a commodity rather than a security.

The exchange cited the approval of Ether futures by the Commodity Futures Trading Commission, remarks from SEC officials, and judicial precedents as compelling evidence supporting this classification.

SEC Not Objecting to Treating Ether as Commodity

Coinbase underscored the SEC’s lack of objection to the designation of Ether as a commodity by the CFTC, bolstering its position.

“Our letter elucidates what is widely recognized by those who have even remotely followed this matter: ETH is unequivocally not a security,” remarked Grewal.

He further noted that both the SEC and the market have consistently treated Ether as a commodity, both pre and post the Ethereum network’s upgrade.

In its letter, Coinbase also put forth additional arguments.

It emphasized Ethereum’s proof-of-stake consensus mechanism, showcasing robust governance and a reduction in the vulnerabilities to fraud and manipulation.

The exchange emphasized the need for the SEC’s approval of spot Bitcoin ETPs to be equally applicable, if not more so, to an Ethereum ETP.

Market data reveals a widespread distribution of ETH ownership and trading activity, indicative of a mature and efficient market.

Additionally, the exchange highlighted Ethereum’s blockchain’s inherent technological and operational security mechanisms, which significantly reduce susceptibility to fraudulent activities and manipulation.

Coinbase also pointed out its own advanced market surveillance measures, including a partnership with the Chicago Mercantile Exchange (CME), aimed at monitoring trading activities across its platforms.

This letter was submitted in response to a proposed rule change by NYSE Arca, seeking to list and trade shares of the Grayscale Ethereum Trust (ETHE) as an Ethereum ETP.

The SEC has called for public comments on the proposed rule change before reaching a decision.

Spot ETH ETFs Could Bring Centralization Risks

Concerns have arisen regarding the concentration risk associated with spot Ethereum ETFs incorporating staking.

Analysts from S&P Global have recently cautioned that the introduction of staking in ETFs might impact the composition of validators participating in the Ethereum network’s consensus mechanism.

While the involvement of institutional custodians could alleviate concentration risks on the Lido decentralized staking protocol, it could potentially introduce new concentration risks if a single entity is entrusted with staking a significant portion of the included Ether.

Managing Director Andrew O’Neill remarked, “The proliferation of ether staking ETFs could influence the composition of validators engaged in the Ethereum network’s consensus mechanism.” He added, “Institutional custodians’ participation might mitigate the existing concentration on the Lido decentralized staking protocol. Nevertheless, it might also introduce fresh concentration risk, especially if a single entity is designated to stake the majority of Ether included in these ETFs.”

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I want to save money. Will cryptocurrency work?

Cryptocurrency is essentially virtual money that operates in a decentralized manner, not through a bank but directly on multiple independent computers.

Every cryptocurrency has two main components: the units of digital exchange called “coins” and the network within which the exchange takes place. These units can be transferred between wallets and exchanged on exchanges. The networks in which these coins exist are called blockchains, which translates to “chains of blocks.”

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