After the buzz around Bitcoin spot ETFs, all eyes are on a possible Ethereum ETF.
The SEC has already delayed decisions on applications from Grayscale and BlackRock. Meanwhile, Fidelity’s proposal, submitted in November, faces a crucial March deadline.
But, what are the chances of these products being approved soon? And does the approval of Bitcoin spot ETFs set a precedent for their potential approval?
Spot Ether ETFs Could Face Challenges Similar to Bitcoin ETFs
Gaining approval for Bitcoin ETFs was a lengthy and legally complex process. Brian Evans, CEO of BDE Ventures, suspects something similar will happen when it comes to the proposed Ether ETFs.
“There will be long, possibly drawn-out discussions over such issues as cash or in-kind redemptions as well as surveillance-sharing agreements,” he told Cryptonews.
“These were some of the issues with the BTC ETFs that had to be sorted out, and I suspect that something similar will play out with Ethereum.” He believes it’s highly likely that they will eventually receive approval.
Impact of Ethereum’s Classification on ETF Approval
Ethereum currently exists in a regulatory ambiguity. But Rostin Behnam, Chair of the Commodity Futures Trading Commission (CFTC), previously said it should be regulated as a commodity.
Clear definitions for decentralization from regulators like the CFTC will play a crucial role in the potential approval of a spot ETH ETF.
“End users of the ETF need clarity on who controls Ethereum if it really is a commodity. Ideally is ‘nobody’ like BTC,” said Pontes co-founer Alejo Pinto.
“The question I would ask if it’s a security: who controls it? Who is responsible for reporting requirements of ETH? I doubt Vitalik would do it,” he added.
Meanwhile, if ether is categorized as a security, this could significantly complicate matters.
Ethereum enables users to use their Ether (ETH) tokens as collateral to support the network and engage in transaction validation. Under its proof-of-stake system, validators lock tokens to secure the blockchain and earn interest-like returns.
Consequently, certain regulators perceive this model as resembling an investment contract. This, by definition, could subject the asset to US securities laws.
What if ETH is a Security?
SEC Chair Gary Gensler has previously suggested that cryptocurrencies offering token staking might be considered securities.
Helika CEO Anton Umnov noted that such a classification would lead to greater SEC oversight and a focus on crypto market maturity.
Cryptosmart CEO Alessandro Frizzoni agreed, saying the possibility of Ethereum being labeled a security poses a hurdle to the ETF’s approval.
“It threatens the survival of the Ethereum project itself and could therefore put the Ethereum ecosystem under great uncertainty. I think Ethereum is decentralized enough to not be classified as a security and therefore the Spot Ethereum ETF will ultimately be approved,” Frizzoni said.
Furthermore, if Ethereum is categorized as a security, it would restrict the involvement of infrastructure partners and custodians in overseeing the ETF.
Conversely, if Ether is not classified as a security, it could potentially follow a less strict regulatory route. It would still be required to address significant concerns related to investor protection and the integrity of the market, according to Web3 security firm HashEx CEO Dmitry Mishunin.
Mishunin pointed out that the market shouldn’t anticipate a substantial price spike after the approval of such an ETF.
“The market has a way of pricing in such developments well before they officially occur, meaning that by the time of approval, the event’s potential impact on Ethereum’s price might already be reflected in its current valuation,” he said.
Industry insiders also say the ETF issuers need to accurately track Ethereum’s price and securely handle custody of the underlying assets. BlackRock getting in on it makes an approval seem more likely, but regulators will still need more clarity.
Spot Ether ETF Approval Timeline
Deutsche Bank expects the first such ETF to be approved by May 23. Meanwhile, TD Cowen expects approval to drag on to 2025 or 2026.
Other crypto executives have mixed opinions, indicating that the outcome primarily hinges on political variables.
COZ CEO Tyler Adams is skeptical it will happen this year, pointing to regulators’ cautious approach when dealing with emerging technologies.
“I think that Ethereum is a pretty large, fundamental leap from Bitcoin due to its underlying model. Ethereum has an infinite supply and its technological volatility renders the discussion increasingly complex – the same does not exist for Bitcoin,” he said.
LayerTwo Labs co-founder Austin Alexander believes that approval may come to fruition in the next year or two.
“Even with a change at the SEC, perhaps with a Trump presidential victory, it’s still unclear to me that new leadership would speed things up in this regard,” he said.
Meanwhile, Phillip Shoemaker, executive director of decentralized identity firm Identity.com is double the spot ETH ETF will ever materialize.
“Look how long it took the BTC ETFs to get approved, after all. If anything, I suspect that the SEC might soon go after the Ethereum blockchain and associated tokens,” he said.
“All this said, I do hope it happens. It would help further mainstream the space.”