The U.S. Securities and Exchange Commission (SEC) announced on Thursday the approval of eight 19b-4 forms for spot Ethereum ETFs, a key milestone for the second-largest cryptocurrency by market value and a watershed moment in the U.S. regulatory stance that unexpectedly shifted from a tough stance to a soft one.
The following fund products were approved in the application: the converted Grayscale Ethereum Trust, the Bitwise Ethereum ETF, the iShares Ethereum Trust, the VanEck Ethereum Trust, the ARK/21 Shares Ethereum ETF, the Invesco Galaxy Ethereum ETF, the Fidelity Ethereum Fund and the Franklin Ethereum ETF.
The approval is a 180-degree turn for the SEC. After approving a spot Bitcoin ETF earlier this year, the SEC has remained silent on similar Ethereum products. Until earlier this week, almost everyone was waiting for the rejection result, but the wind suddenly changed in recent days. A few days ago, Bloomberg analysts Eric Balchunas and James Seyffart raised the approval probability from 25% to 75%.
Will ETH be defined as a commodity?
Coinbase Chief Legal Officer paulgrewal.eth commented on the X platform that the approval of the spot Ethereum ETF means that "ETH is actually considered a commodity."
Just a few weeks ago, Ethereum software company Consensys filed a lawsuit against the U.S. SEC, accusing the regulator of secretly treating ETH as an illegal, unregistered security for more than a year. Analysts pointed out that if the SEC officially lists ETH as a security, then the spot Ethereum ETF will need to be approved through a different procedure than the current one.
Therefore, the SEC's approval of the spot ETH ETF today seems to be a tacit admission that ETH itself is not a security. Given the key role ETH plays in the Ethereum network, such an outcome is a major victory for the crypto industry.
Notably, several ETH ETF issuers removed clauses regarding customer ETH staking from their applications this week to increase their chances of approval.
Since Ethereum transitioned to a proof-of-stake system in September 2022, ETH holders have been able to deposit funds into the network to earn rewards. The SEC has long believed that when financial intermediaries provide staking services, it is tantamount to engaging in an illegal unregistered securities scheme.
Unlike futures ETFs that track derivative contracts, issuers actually purchase and store ETH on behalf of their customers. Now that spot ETH ETFs have been approved, traditional financial institutions and investors will soon be able to invest in ETH without having to hold the cryptocurrency themselves.
“I’ve been calling the spot bitcoin ETF approval the IPO of bitcoin,” said Cody Carbone, chief policy officer at lobbying group the Chamber of Digital Commerce. “This is the IPO of ETH, and it’s a huge approval.”
Regulatory changes are linked to political trends
The approval of the Ethereum ETF suggests that the SEC may be softening its stance on cryptocurrencies after a series of legal battles. The agency lost its lawsuit against Grayscale in 2023, which prompted it to approve the Bitcoin product.
In addition, many analysts pointed out that the SEC's transformation is closely related to U.S. politics. With the support of a large number of Democrats, the House of Representatives passed an important FIT21 bill (Financial Innovation and Technology Act for the 21st Century), although the Biden administration had expressed opposition to the bill earlier in the day.
Last week, the House and Senate passed a resolution overturning SEC accounting guidance on how custodians account for cryptocurrencies after the White House sent a notice that Biden intended to veto the narrower bill. In addition, former President and possible Republican nominee Donald Trump recently began accepting cryptocurrency donations.
It will take some time to go public
Although 19b-4 has been approved, ETF issuers still need the SEC to sign and approve their respective S-1 registration statements in order for the spot ether ETF to officially begin trading. Industry analysts say this could take days, weeks or even months.
According to a source close to the process, there is still a lot of work to be done on the S-1. They said it could take weeks to resolve any issues, but that ultimately depends on how responsive the SEC is, and that exchanges and issuers haven’t even started discussing putting the product live yet.
“I think if they worked overtime, they could get it done in a few weeks, but there are plenty of examples in history where this process took more than three months,” said James Seyffart, an ETF analyst at Bloomberg.
According to a new report from Galaxy Digital, a spot Ether ETF, if approved, could be listed on exchanges in July or August.
Galaxy Digital said in a report that the risk profile of a spot Ethereum ETF is “significantly” higher than that of a spot Bitcoin ETF, which could prolong regulators’ decision-making on the fund. The process of approving funds and listing them on exchanges may also take longer due to the various decentralized applications being built on the Ethereum network, the report said. The researchers said these dapps “add to a host of possible discloseable [items],” which could make it more difficult for spot Ethereum ETFs to obtain final regulatory approval and begin trading.
Will the amount of funds be less than that of Bitcoin ETF?
Some analysts predict that the ETH ETF will have relatively small spot inflows compared to Bitcoin. The Grayscale Ethereum Trust currently has about $11 billion in assets, which is much smaller than the company's Bitcoin fund before the conversion, and most investors do not want to miss out on staking rewards.
“If you had opened a 1,000 ETH position with an ETF provider on January 1, 2023, instead of holding native ETH to earn staking rewards, you would have missed out on over $200,000 in gains,” a recent CCData analysis stated.
Steven Lubka, managing director of Swan Bitcoin and head of Swan Private, said the lack of collateral in ETF products is one reason why Ethereum ETFs have seen lower demand than Bitcoin ETFs. “The numbers don’t match up with the inflows into the Bitcoin ETF, and there are some structural differences in the product that make it less attractive overall,” Lubka said.
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