Chatter around potential approval of ethereum ETFs swept through the financial world this week. Ether prices surged on speculation of ether ETF approvals. But as with all things crypto-centric in the U.S., the picture is much more complex for investors eager to gain spot ether access via an ETF.
Ethereum is the second largest blockchain platform and holds strong appeal for many crypto afficionados. It’s home to a robust ecosystem of decentralized applications, including DeFi (decentralized finance) and NFTs.
Where ethereum excels over bitcoin, the largest blockchain by market share, is in its smart contracts and its energy efficiency. Ethereum was the first blockchain to offer smart contracts. It’s a contract on the blockchain that does not require a third party and self-executes when conditions are met. These contracts are also largely immutable. Bitcoin has since added smart contracts but can currently only handle noncomplex versions.
Back in 2022, ethereum completed the Merge, in which it transitioned from a proof-of-work model to a proof-of-stake. It led to a 99.9% decrease in energy consumption, something bitcoin is notorious for. This energy efficiency could make investing in ether — the native token of the blockchain — more appealing for some ETF investors.
Chatter on the Street
Reuters reported on Tuesday that, according to sources, the SEC reached out to major exchanges for revisions to their 19b-4 filings. As of this morning, CboeBZX filed updates on five spot ETFs and Nasdaq filed an update for the BlackRock spot ether ETF filing, reported The Block.
“Many of us in the industry expected a delay in regulatory approval of ether ETFs,” said Todd Rosenbluth, head of research at VettaFi. “However, the SEC has been engaging with issuers this week, and documents have been refiled, making it seem likely that we will have new spot crypto ETFs.”
Should the 19b-4s receive approval this week, there’s still a longer road to their launch. The SEC’s division of trading and markets reached out to exchanges this week. Filings are step one of a two-part process to launch. The division of corporate finance handles step two, the S-1 registrations from issuers. These registrations have no timeline.
“These applications contain hundreds of pages of disclosures,” Steven McClurg, head of U.S. asset management at CoinShares, told Reuters. “I can’t imagine that they could review this in time for a launch by May.”
The Block reported that issuers’ calls to the corporate finance division this week revealed a lack of internal communication within the SEC.
The Benefits to Investors of Ethereum ETFs
Image source: Bloomberg Intelligence
The addition of spot ether ETFs brings benefits to investors, the most immediate of which would be more cryptocurrency choices for traditional investment portfolios. Ethereum ETF approvals would add diversification for mainstream investors looking to invest in cryptocurrencies.
“The biggest winners in these ETFs will be the end investors who are looking for cheap, efficient, and transparent exposure to this asset,” explained James Seyffart, CFA, CAIA, ETF research analyst for Bloomberg Intelligence. “As we saw with the Bitcoin ETFs, the competition will likely drive down costs for end investors.”
Bitcoin ETFs continue to draw in substantial flows. From January launch to May 20, these funds experienced inflows of $12.9 billion. These flows in turn drove higher returns, with bitcoin prices rising 6% for every $1 billion in flows, according to Citi analysis, reported Investing.com.
Bitcoin ETFs also launched into a substantial amount of hype — and leverage. Bitcoin prices declined 17% in the wake of approvals. Ethereum ETFs haven’t received the same amount of prolonged attention and market buzz. According to Citi, the open interest on ether only recently started to rise. This may lead to less volatility should the funds receive approval and launch in the coming months.
“There has been strong demand for spot bitcoin ETFs in 2024 offered from some well-established asset managers,” noted Rosenbluth. “I believe there will be demand for pending ether ETFs, albeit less than what we’ve seen for bitcoin.”
The Long Road to Possible Spot Ethereum ETFs
Speculation abounds that the rapid pivot is politically motivated. The U.S. has long lagged European markets in terms of crypto regulation and adoption. While spot bitcoin ETFs gained approval in January, no clear regulation regarding digital assets and cryptocurrency exists in the U.S. at the federal level.
President Biden called for a review of digital assets back in March 2022. The hope was to help bring better definition to digital assets as they relate to investors and agency oversight. In other words, it attempted to create a foundation from which regulation could be created — regulation which has yet to meaningfully materialize. The SEC and CFTC still cannot agree on fundamental basics, such as if cryptocurrencies are classed as commodities or securities.
The House votes on the Financial Innovation and Technology for the 21st Century Act this week. Commonly referred to as Fit21, the legislation seeks to give regulatory authority over crypto to the CFTC. It also aims to solidify which aspects of crypto the SEC oversees. SEC Chair Gary Gensler strongly disapproves, citing a risk to investors as well as broader markets.
“The Financial Innovation and Technology for the 21st Century Act (‘FIT 21’) would create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk,” Gensler said in a statement today.
The Broader Benefits Should Current Political Winds Change
The lack of solid regulation in the U.S. has many crypto companies looking to move overseas. For those that see the crypto economy as a major source of innovation and the potential next evolution for finance, such a move would put the U.S. at a distinct disadvantage.
As of now, it’s unclear whether the abrupt about-face is politically motivated or not. The lack of internal communication within the SEC and the previous rapid reversal of a seemingly disapproving stance indicate that it’s a possibility.
For Seyffart, a politically driven approval would have much larger implications. “If we are correct about the 180-degree pivot from the SEC on these ETFs and this actually was a sort of last-minute political decision from higher ups in the Biden administration — that would have far larger positive implications for digital assets and the DeFi ecosystem than simply ‘We are likely getting an Ethereum ETF’”.
It’s a perspective that Mike Novogratz, CEO of Galaxy Digital, agrees with. Ethereum, bitcoin, and crypto prices “are going to be much higher than here,” should the political climate be changing, Novogratz told Forbes. “It feels like someone at the Biden White House made a call and said, ‘Guys, we can’t be the party against crypto anymore.’”
Ether soared 30% this week, while bitcoin crossed above $70,000 for the first time in a month.
See also: “Cryptocurrencies: Ether Surges 30% From Last Week”
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