Thursday, U.S. regulators took a big step toward approving spot ether exchange-traded funds. This could help the world’s second-most popular cryptocurrency become more widely used.
The New York Stock Exchange, Nasdaq, and a Cboe subsidiary exchange asked the Securities and Exchange Commission to change the rules so they could list spot ether ETFs. The SEC agreed to the changes.
The SEC approved the 19b-4 filings, but issuers like VanEck, Fidelity, BlackRock, Grayscale, Franklin Templeton, Ark/21Shares, and Invesco/Galaxy still need to get their registration statements approved before the products can be sold to the public.
Investment advisor and president of the ETF Store Nate Geraci told MarketWatch that he thinks the SEC will approve the registration statements in the end, but that the agency will “slow play” the process.
Analysts say that the SEC could approve the registration statements as soon as two weeks, but they think it will take at least that long.
A big change in the SEC’s view on ether ETFs in a short amount of time during the approval process is worth mentioning.
Since the SEC hasn’t been working on the case, people in the crypto industry have been doubtful about an approval in May for months.
But on Monday, the agency told Nasdaq, Cboe, and the New York Stock Exchange to change their applications to list spot ether ETFs. This suggests that the regulator may be leaning toward approving these products.
The SEC’s sudden change of heart isn’t completely clear, but there is talk in Washington, DC, that it’s part of a larger White House decision to become less hostile toward crypto. Christopher Niebuhr, a senior analyst at Beacon Policy Advisors, wrote this in a Friday client note. “A strong opposition to crypto markets may no longer make political sense for some Democrats and maybe even the White House.”
The House of Representatives passed FIT-21, a landmark crypto bill on Wednesday. This bill would create a targeted disclosure and registration regime for digital-asset companies and give the Commodity Futures Trading Commission (CFTC) instead of the SEC primary responsibility for regulating the industry.
The law passed with 71 Democratic votes, which was more than what people in the industry thought would happen at the beginning of the week. It also passed with almost unanimous Republican support.
What the Biden administration said about the law also gave people more faith that Democratic regulators would be friendlier to the industry in the future.
The Biden administration spoke out against the FIT-21 law but said it was looking forward to working with Congress to make its own crypto rules that would provide “adequate safeguards for consumers and investors while creating the conditions needed for innovation.”
Crypto skeptics said the SEC broke their duty to protect investors by making this decision.
Better Markets’ director of securities policy, Benjamin Schiffrin, called the decision “a historic mistake” that will “only allow investors to be further victimized by the lawless crypto industry.”
That ether is very unstable and that the “Ethereum network itself has features that make it vulnerable to fraud and manipulation,” was his main point.
FactSet says that the price of ether has gone up about 28% in the last seven days because people are hopeful that ETFs will be approved. Thompson said that the gains could last as long as there are meaningful flows into the ether products.
Geraci of the ETF Store said that potential demand for ether could be strong, though not in comparison to recently approved spot bitcoin BTCUSD, +0.58% ETFs.
“The underlying spot ether market is approximately one-third the size of bitcoin. I think it’s reasonable to expect something similar with spot ether ETFs — that demand will be roughly one-third of spot bitcoin ETFs,” he said.
Earlier this week, several would-be ether ETF issuers amended their filings at the request of the SEC to remove plans for staking the ether they would purchase for the funds.
Staking refers to a process in proof-of-stake blockchains where investors lock up their cryptocurrency to validate transactions and earn rewards.
The absence of the staking option with ether ETFs may weigh on such products’ demand, as staking ether generates an additional yield, noted Peter Eberle, president and chief investment officer at Castle Funds. Staking ether currently offers a return of about 3.5% annually, according to the Ethereum Foundation.
“If someone is a long-term holder, that makes a big difference,” Eberle said. “With the BTC ETF there is no such disadvantage.”
Bitcoin operates with a different consensus mechanism called proof-of-work, where the blockchain is secured by miners solving complicated mathematical problems.
Eberle said he also doesn’t think there will be much institutional demand for ether ETFs. As ether and bitcoin prices remain highly correlated, institutions would not have much incentive to allocate to ether ETFs if they are already invested in bitcoin ones, he noted.
The lack of the staking option with ether ETFs may also lead to arbitrage trading where traders may stake their ether while shorting the ETFs, according to Matt Ballensweig, head of Go Network
