The US Securities and Exchange Commission’s approval of spot bitcoin ETFs last week marked a long-awaited milestone.
Though issuers have lined up to also offer ETFs that would hold ether directly, the regulator’s upcoming ruling on those is not necessarily straightforward, industry watchers say.
Ark Invest and 21Shares filed jointly for a spot ether ETF in September. Fund group VanEck, which first applied for such a fund in 2021, refiled for one the same day.
Grayscale Investments moved in October to convert its Ethereum Trust into a spot ether fund, while BlackRock revealed plans for a spot ether ETF the following month.
Sandy Kaul, Franklin Templeton’s head of digital asset and investor advisory services, said during an interview with Bloomberg that it’s reasonable to expect other crypto assets to “[move] into vehicles that make it easier for investors to put their money into this space.”The company has not yet filed for a spot ether fund, though Kaul said investors can expect more crypto-related filings from the firm.
Is ether a commodity or a security?
The Commodity Futures Trading Commission has indicated it believes ether — like bitcoin — is a commodity.
The regulator oversees the Chicago Mercantile Exchange (CME), which launched ether futures contracts in February 2021. The SEC approved ETFs that hold ether futures contracts last October.
Despite the CFTC’s stance, the SEC has not explicitly endorsed the view that ether is a commodity, noted CK Zheng, co-founder of crypto hedge fund ZX Squared Capital.
When US Rep. Patrick McHenry asked SEC Chairman Gary Gensler last year if ether was a security or a commodity, Gensler did not give a clear answer.
“Since the futures based ETH ETFs have been approved last year, logically speaking the spot ETH ETFs shall be approved without too many hurdles — unless the SEC has more concerns about the spot market manipulations around ETH pricing, or believes ETH is a security,” Zheng told Blockworks.
BlackRock’s Nov. 15 spot ether ETF filing states that the legal tests for determining whether a digital asset is a security or not “often leave room for interpretation.”
“The sponsor may dissolve the trust if the sponsor determines ether is a security under the federal securities laws, whether that determination is initially made by the sponsor itself, or because the SEC or a federal court subsequently makes that determination,” the disclosure adds.
‘Not holding my breath’ on spot ETH ETF approval
With spot bitcoin ETFs gaining approval, “there’s no theoretical reason the SEC shouldn’t also approve spot ether,” according to Lara Crigger, editor-in-chief at VettaFi.
But the SEC, Crigger told Blockworks, was pretty clear that spot bitcoin ETF approval was not an indication the regulator would greenlight other spot crypto funds.
Gensler said in a Jan. 10 statement that approval of spot bitcoin ETFs was “the most sustainable path forward” given its court loss to Grayscale Investments.
“Importantly, today’s commission action is cabined to ETPs holding one non-security commodity, bitcoin,” Gensler said. “It should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities.”
He reiterated in the statement that “the vast majority of crypto assets” are investment contracts that fall under federal securities laws.
“So when it comes to spot ether ETFs — or any other spot crypto ETFs — I’m not holding my breath,” Crigger said.
Bloomberg Intelligence analyst James Seyffart is more bullish on the prospect. The SEC did not argue that ether futures contracts were securities futures rather than commodities futures, he noted last week during the On the Margin podcast. The agency then approved ether futures ETFs.
Bitcoin futures funds preceded eventual spot bitcoin ETF approval.
“I think the same thing is going to happen for Ethereum,” Seyffart said. “If [Gensler] goes after ETH, it’s not just going to be a lot of these industry players; it will also be the CFTC that he has to contend with, and it’s just not worth it.”
When could approval happen?
Bitwise Chief Investment Officer Matt Hougan said during the same podcast that while it’s “a relatively large leap” to the SEC approving spot ether ETFs, he believes such funds are “in sight.”
The SEC has 240 days — from the time the spot ether proposals are published in the federal register — to rule on them. Plans for the first such proposed fund, the VanEck Ethereum ETF, hit the federal register on Sept. 26, setting up a May 23 deadline. The proposal by Ark Invest and 21Shares was published to the register the following day.
“The SEC may want to take a lengthy observation period to examine the health of the newly approved spot BTC ETFs market before turning a green light in this space,” Zheng said. “Overall I’m very bullish on the arrival of the spot ETH ETFs, which will attract far more institutional investors in the foreseeable future.”