Following the excitement surrounding Bitcoin spot ETFs, the focus has now shifted to the potential approval of an Ethereum ETF.
The SEC has already postponed its decisions regarding applications submitted by Grayscale and BlackRock. Simultaneously, Fidelity’s proposal, which was submitted in November, is approaching a critical deadline in March.
The question on everyone’s mind is: What are the prospects for the approval of these Ethereum ETFs in the near future? Furthermore, does the prior approval of Bitcoin spot ETFs establish a precedent that could impact their potential approval?
Spot Ether ETFs Could Face Challenges Similar to Bitcoin ETFs
Obtaining approval for Bitcoin ETFs involved navigating a protracted and legally intricate process. Brian Evans, the CEO of BDE Ventures, anticipates a parallel scenario when it comes to the proposed Ether ETFs.
Evans shared his insights with Cryptonews, explaining that protracted and possibly extensive deliberations are likely to revolve around critical matters such as cash or in-kind redemptions and surveillance-sharing agreements. These were pivotal issues that needed resolution with BTC ETFs, and Evans surmises that a comparable process will unfold with Ethereum. Nevertheless, he holds a strong belief that eventual approval is highly probable.
Impact of Ethereum’s Classification on ETF Approval
Ethereum currently finds itself in a regulatory gray area, with no clear-cut classification. However, Rostin Behnam, Chair of the Commodity Futures Trading Commission (CFTC), has previously advocated for its regulation as a commodity.
The development of precise definitions, particularly in terms of decentralization, by regulatory bodies such as the CFTC, will play a pivotal role in the potential approval of a spot ETH ETF.
Pontem co-founder Alejo Pinto emphasizes the importance of clarity for ETF end users regarding Ethereum’s control if it is indeed deemed a commodity. Ideally, the scenario would resemble that of Bitcoin, where control is decentralized, if not entirely attributed to “nobody,” like BTC.
However, if Ethereum is categorized as a security, the situation could become considerably more complex.
Ethereum allows users to utilize their Ether (ETH) tokens as collateral to support the network and participate in transaction validation. In its proof-of-stake system, validators lock tokens to secure the blockchain and earn returns akin to interest.
As a result, some regulators perceive this model as resembling an investment contract, potentially subjecting the asset to United States securities laws.
What if ETH is a Security?
SEC Chair Gary Gensler has previously raised the idea that cryptocurrencies offering token staking could potentially be categorized as securities.
Anton Umnov, CEO of Helika, highlighted that such a classification would bring about heightened SEC oversight and a concentrated effort to mature the cryptocurrency market.
Alessandro Frizzoni, CEO of Cryptosmart, echoed these concerns, emphasizing that the possibility of Ethereum being designated as a security presents a significant obstacle to the approval of an Ethereum ETF. He pointed out that this classification could even threaten the viability of the Ethereum project itself, leading to a state of uncertainty within the Ethereum ecosystem. Frizzoni holds the belief that Ethereum’s level of decentralization should preclude it from being classified as a security, ultimately leading to the approval of a Spot Ethereum ETF.
Moreover, if Ethereum were to be classified as a security, it would impose limitations on the involvement of infrastructure partners and custodians in the oversight of the ETF.
Conversely, if Ethereum (Ether) avoids being classified as a security, it may face a less stringent regulatory pathway. However, it would still need to address significant concerns related to investor protection and market integrity, as highlighted by Dmitry Mishunin, CEO of Web3 security firm HashEx.
Mishunin emphasized that the market should not necessarily expect a substantial price surge following the approval of an Ethereum ETF. He pointed out that the market often anticipates and factors in such developments well in advance, meaning that the potential impact on Ethereum’s price might already be reflected in its current valuation by the time approval is granted.
Additionally, industry insiders stress the importance of ETF issuers accurately tracking Ethereum’s price and securely managing the custody of the underlying assets. While the involvement of firms like BlackRock could increase the likelihood of approval, regulators will still require more clarity and assurance in the process.
Spot Ether ETF Approval Timeline
The timeline for the approval of an Ethereum ETF varies among financial institutions and industry experts. Deutsche Bank anticipates that the first Ethereum ETF could receive approval by May 23, suggesting a relatively near-term timeline. In contrast, TD Cowen has a more conservative outlook, projecting that approval may not occur until 2025 or even 2026.
Crypto executives and experts have diverse opinions on the matter, with some indicating that the outcome heavily depends on political variables. Tyler Adams, CEO of COZ, expresses skepticism about an approval happening this year, highlighting regulators’ cautious approach when dealing with emerging technologies. He points out that Ethereum’s fundamental differences, such as its infinite supply and technological complexity, make the discussion more intricate compared to Bitcoin.
On the other hand, Austin Alexander, co-founder of LayerTwo Labs, is more optimistic, believing that approval could become a reality within the next year or two. The varying viewpoints reflect the uncertainty and complexity surrounding the approval of an Ethereum ETF.
“Even with a change at the SEC, perhaps with a Trump presidential victory, it’s still unclear to me that new leadership would expedite the process in this matter,” commented one observer.
In contrast, Phillip Shoemaker, executive director of decentralized identity firm Identity.com, is considerably skeptical about the likelihood of a spot Ethereum ETF ever becoming a reality. He pointed to the protracted approval timeline for Bitcoin ETFs as an example, suggesting that the SEC may eventually turn its attention towards regulating the Ethereum blockchain and its associated tokens.
Despite the uncertainty, Shoemaker expressed his hope that such an ETF would eventually be approved, as it could contribute to the mainstream adoption of cryptocurrencies.