With the SEC set to make a decision in May, the question now is whether ether ETFs will be approved following the successful debuts of spot bitcoin ETFs in the US.
The underperformance of Ethereum (ETH) in the current bull market is a noteworthy pattern. This underperformance has been worse over the last several weeks as investors have become less optimistic about the likelihood that the SEC will approve the spot ETF decision on May 23.
Just now, the price ratio of ETH to BTC fell below 0.05, which is the lowest since May 2021, when Ethereum started to gain traction as an institutional-grade asset.
The market was expecting a green light from the SEC on May 23 after the spot BTC ETF approvals in January 2024, as late as February 2024. The last few weeks have seen a sharp decline in this viewpoint, to the point where the SEC is currently the voice of denial. Over the course of the last month, the market-implied likelihood of denial has been proxyd by the discount to NAV on the closed-ended Ethereum trust ETHE, which went from 8% to over 25%.
The markets will continue to discuss spot ETH ETFs as May 23 draws near and, if they are not approved by then, over the course of the following few quarters. Let’s examine the principal defenses and rebuttals of approval.
The Argument Against Refusal
The market has been moving in the direction of anticipating that the SEC won’t approve a spot ETH ETF by the end of May during the last few weeks. A few points determine how this debate proceeds.
First, with less than two months until the deadline, there has been essentially no communication between the SEC and issuers. This stands in stark contrast to the spot BTC approval procedure, where a public back-and-forth was evident in the months preceding the approval due to a flurry of amendment filings. The current public call for comments is typical and should not be interpreted as an engagement from the regulator, despite what some have claimed.
The belief that the SEC only reluctantly issued the spot BTC ETF approval is another important consideration. The use cases that Ethereum now permits, including decentralized finance, might complicate the SEC’s vetting procedure.
One such detail is the SEC’s persistent failure to clarify whether Ethereum is a security or not, even in the face of claims to the contrary from its sister agency the CFTC.
The Argument in Support of Approval
Even if they are not explicitly advocating for a May approval, some analysts and investors are presenting strong reasons against the conventional narrative of denial.
The chief legal officer of Grayscale made the suggestion that the result is not always predictable in the absence of interaction. Unlike the BTC spot ETF approval procedure, there isn’t much to talk about right now. There was a lot of back and forth between the SEC and the issuers of BTC ETFs on the redemption mechanism (cash versus in-kind), but it is now a settled matter.
The one thing about which there might be disagreement is if native ETH staking would be permitted by the SEC. The general consensus is that staking is unlikely to be permitted initially, despite the demand from some issuers. The SEC can easily address that matter during the approval process for a proposed rule change or at a later time when it examines the S1 (or S3) forms that are necessary prior to launch.
Furthermore, there’s a good chance the applicants would file a lawsuit in the event of a denial, and the issuers would have a compelling case. The high correlation between the spot BTC and CME BTC futures markets was a determining factor in the approval of the spot BTC ETF. The same level correlations for ETH are found in analyses by Fidelity, Bitwise, and Coinbase, therefore it is doubtful that the SEC will bring up this matter again.
Gazing Forward
The approval of the spot Bitcoin ETF in January was not really significant. Chair Garry Gensler swayed the scales, with two of the five SEC commissioners voting in favor and the other two voting against. Gensler might once more throw the deciding vote on the spot ETH ETF.
Only one of the more than 575 ETFs that BlackRock filed as an issuer was rejected by the SEC. Will the second be the spot Ethereum ETF? If there is one thing that cryptocurrency investors have learnt over the years, it is that last-minute surprises should never be ruled out, despite the market’s relatively high odds of denial.
Beyond the approval period that concludes on May 23, the introduction of spot ETH ETFs into the U.S. market appears to be a matter of “when” rather than “if.” Over time, the case for approval will probably prevail over the case against. Consequently, there is a good likelihood that the project will receive permission during the next 12 to 18 months, even if it is not approved by May 23.