Ethereum ETF approved, don’t hold your breath for altcoin ETFs

Author: Nikita Ovchinnik Source: blockworks Translation: Shan Ouba, Golden Finance

On May 23, 2023, the U.S. Securities and Exchange Commission (SEC) approved the first spot Ethereum ETF, an important milestone in the cryptocurrency market. However, while this is a positive decision, it is not a complete victory for the crypto community.

The move follows the approval of a Bitcoin ETF in January. Both approvals appear to indicate a shift in regulators' attitudes toward digital assets, which will undoubtedly lead to wider adoption.

However, the wait for other cryptocurrency ETFs may be much longer than that for Ethereum. The SEC's approval of the Ethereum ETF also symbolizes the dawn of a gradually forming regulatory environment that will be dangerous for decentralization and its leading advocates.

Reasons for the Change of Attitude

It can be said that the SEC has woken up.The decision to approve the Ethereum ETF appears to be based on market pressure and strategic considerations.

Approving the Ethereum ETF means that the SEC clearly recognizes that major cryptocurrencies such as Ethereum and Bitcoin are becoming an integral part of the financial ecosystem - widely adopted, accepted, and operating globally - which requires appropriate regulation from authorities rather than fragile "protectionist" opposition. By shifting to this approach, the SEC can take advantage of the vitality of the field while providing a structured environment to protect investors and maintain market integrity.

The SEC's Ethereum ETF regulatory framework improves investor protection through several key measures, mainly a comprehensive monitoring sharing agreement with institutions such as the Chicago Mercantile Exchange (CME), requiring transparent pricing and portfolio holdings, and requiring disclosure of risks associated with cryptocurrency investments. These measures enhance investor safety in the cryptocurrency field.

The decision to approve an Ethereum ETF may also be influenced by the need to maintain the United States’ competitive edge in financial innovation.

Cryptocurrencies and blockchain have the potential to drive significant economic growth, enhance security in key industries, foster innovation through new business models such as decentralized finance (DeFi), and create new investment opportunities. By embracing cryptocurrencies, the SEC can help the nation remain competitive.

One ​​side wins, the other side loses

At first glance, the ETF’s approval appears to be a clear win for crypto advocates, but it also signals tighter regulation in many areas.

The SEC’s focus on fraud prevention and market integrity means that exchanges and wallets alike may face more scrutiny. This will force them to make a difficult choice between complying with regulations and risking being excluded from the mainstream financial system.

As a result, it becomes more difficult to achieve true decentralization. These platforms may soon have to choose between abandoning their principles and dealing with ongoing obstacles—namely, compliance burdens, increased costs, and increased monitoring. These challenges require centralized oversight and data collection. Clearly, attempting to maintain decentralized principles could lead to exclusion from mainstream finance, potentially limiting the user base and liquidity of these decentralized platforms.

Under the leadership of current Chairman Gary Gensler, the SEC has consistently sent cautious, incremental signals, focusing primarily on transparency, market integrity, and investor protection. Despite the approval of the Ethereum ETF, a large number of approvals of other altcoin ETFs—which would unlock tremendous growth potential for the industry and foster an environment of trust and compliance that benefits all stakeholders—are highly unlikely in the near term due to the SEC’s cautious approach and ongoing concerns about market manipulation and investor protection.

As Gensler said in a statement following the Bitcoin ETF approval, “This [does not represent] the Commission’s view on the status of other crypto-assets under the federal securities laws or on the current incompliance of certain crypto-asset market participants with the federal securities laws.”

Most crypto-assets are investment contracts and, as such, are subject to the federal securities laws. Investors should remain cautious of the numerous risks associated with Bitcoin and products whose value is pegged to cryptocurrencies.

Ultimately, the public decides

While the decision to approve an ETH ETF is significant, the impact on the established crypto community itself will be relatively limited. There will always be those who prefer the decentralized and anonymous nature of cryptocurrencies over regulatory compliance, and these purists are unlikely to turn to ETFs.

Nevertheless, an Ethereum ETF will attract a wave of new investors who were previously skeptical or hesitant. I expect these new entrants will significantly increase market liquidity and drive broader adoption.

But while the ETF approval signals a more open mindset from the SEC, it also foreshadows regulatory challenges in many areas. However, this moment remains a critical step in integrating digital assets into traditional finance.

The fate of cryptocurrencies now rests firmly in the community’s ability to navigate the evolving regulatory landscape and, as always, the public’s willingness to embrace these new financial products.