By Daniel Kuhn, CoinDesk; Compiled by Deng Tong, Golden Finance
The U.S. Securities and Exchange Commission (SEC) has approved important rule changes to allow exchange-traded funds to hold Ethereum’s native token, ETH.
I’ve never understood why SEC Chairman Gary Gensler would insist on approving these spot ETH products, given his embarrassment in actively pursuing the listing of a Bitcoin ETF.
Recall that the three-judge panel of the Court of Appeals called the SEC’s reasons for rejecting (and denying and denying) spot Bitcoin funds “arbitrary and capricious” because it had approved Bitcoin futures products that essentially do the same thing. The same applies to ETH, and some companies may well be happy to litigate the matter in the same way that Digital Currency Group fought against the Bitcoin ETF.
This time around, the SEC’s decision seems equally arbitrary, just in the opposite direction. Hours before the approval was made public, Gensler told CoinDesk’s Jesse Hamilton that he would follow “how the courts interpret the law” and that “the D.C. Circuit took a different view, and we considered that and adjusted.”
So why now? What does this mean for Ethereum’s future? Does it bode well for other cryptocurrencies?
Is the decision politically motivated?
As many have already noted, the regulatory landscape for cryptocurrencies appears to have changed dramatically. On Thursday, the House of Representatives took a historic vote to approve the most substantive cryptocurrency legislation to date. Prior to that, both chambers of Congress voted to repeal the controversial SEC cryptocurrency custody accounting rules.
With Democrats heavily involved in both bills, the U.S. government’s long war on cryptocurrencies appears to be coming to an end. Notably, President Biden announced that he would not veto FIT21, the cryptocurrency market structure bill that the White House formally opposed — a pretty significant concession.
All of these events may have served as a test bed and helped Gensler believe that his stance on cryptocurrencies was becoming a political risk. After all, former President Donald Trump had just announced his strong support for cryptocurrencies — and the SEC allegedly rejected an Ethereum ETF after failing to hold a “productive” meeting with the applicant.
To be sure, the SEC did not approve an Ethereum ETF for listing anytime soon, instead approving 19b-4 proposals from CBOE, NYSE, and Nasdaq, which will allow the funds to go public once S-1 filings from companies like Ark Invest, Bitwise, BlackRock, Fidelity, and Grayscale are approved. That could take months.
What does this mean for Ethereum?
First, the launch of a spot ETH fund means that more institutions may soon be interested in the second-largest cryptocurrency. Not only does the move serve as a kind of approval, but it also creates a familiar on-ramp for any retail investors and hedge funds (primarily in the United States) looking to diversify their 401(k)s to buy into the asset. Just like the Bitcoin ETF.
"Many people were caught off guard by the Ethereum ETF announcement. While the Bitcoin ETF creates a crypto ETF roadmap for large registered investment advisors, I still expect many institutional stakeholders are now scrambling to get their sales teams educated on the state of Ethereum and build the appropriate infrastructure," said Michael Anderson, co-founder of Framework Ventures, in an emailed statement.
While ETFs are really just a vehicle to gain exposure to the underlying asset, these funds actually have the potential to attract more users to invest in Ethereum itself. One scenario: Since the SEC may not allow fund managers to stake the underlying ETH, new Ethereum investors may decide to do it themselves to earn an additional yield of about 3.5%.
On a related note, as Variant Chief Legal Officer Jake Chervinsky noted on X, the approval may answer a lingering question: whether ETH is a security. If the funds are allowed to trade, Chervinsky said, it could mean that unstaked ETH would not be considered a security by the agency. Considering that many institutions are currently holding off on investing simply because of regulatory uncertainty, this in itself could spur more institutions to enter the market.
From a more technical perspective, there are a lot of unanswered questions about what this means for Ethereum in a world where these funds buy up large amounts of ETH like Bitcoin ETFs (assuming they are as popular as Bitcoin ETFs). At some point, the buying pressure will be significant for the network and other Layer 2s.
Ethereum has a burn mechanism built in where tokens are destroyed with every transaction, which has been deflationary for the asset class for a long time. However, with the growing popularity of L2 and blockchains like Solana, Ethereum transaction volume has fallen to the point where ETH supply is growing again, which has long-term implications for the price and demand of the asset. ETFs can help support the economics of ETH.
Finally, it will be interesting to see how these funds affect the staking economy. Some have been sounding the alarm about the amount of ETH being staked, and now apps like Lido are making it easy for people to lock up even small amounts of cryptocurrency. These concerns could be compounded by the fact that an ETF has the potential to take more ETH out of circulation.
What does this mean for blockchains like Solana?
As mentioned earlier, approval of an Ethereum ETF is in some ways a validation for Ethereum, and could also be an opportunity for the chain to lock in its already dominant position.
“Assuming the Ethereum ETF sees a fraction of the institutional flow that the Bitcoin ETF sees, I think it’s entirely possible that Ethereum could solidify as the undisputed leader of decentralized application platforms over the next few years, at least in terms of market share and valuation,” Anderson said.
But the move could also open the door for blockchains like Cardano, Solana, and Ripple to move further into high-end finance. Of course, Bitcoin and ETH have an easier time (in the long run) now that financial giants like CME have embraced them. Ethereum futures have been live at CME for three years, and it’s unclear if other crypto assets are being considered.
It’s also worth noting that while the SEC has hinted that it considers ETH to be a security, the agency has proactively come out and said that assets like SOL, ADA, and ALGO meet the definition outlined by the Howey test used to determine if something is an investment contract. This could be an important step on the road to a spot SOL ETF.
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