The Case for and Against Ether ETFs

Will ether futures exchange-traded funds launch this year?

Spot bitcoin ETFs aren’t the only cryptocurrency exchange-traded funds U.S. regulators have been blocking for years. Ether ETFs have also met resistance from the SEC.  

The first ether ETF filing was submitted in July 2016 when EtherIndex attempted to get its fund greenlighted by the SEC. It failed, and seven years later, there’s still no ether ETF trading in the U.S.  

But that could change soon, according to Stuart Barton, co-founder and CIO of Volatility Shares—the issuer behind the Volatility Shares 2x Bitcoin Strategy ETF (BITX) and the firm that’s currently first in line to launch a potential ether futures ETF. 

I recently sat down with Barton to understand why he thinks the SEC might finally be amendable to an ether futures ETF.  

“Reasons for us to believe it may come to market are similar to the argument I’ve made about [BITX], and that is, why not? Ether and ether futures have a lot more in common with bitcoin and bitcoin futures than a lot of the other tokens and coins,” Barton said.  

“There are liquid futures trading on ether and these futures are trading on regulated markets. It doesn’t seem to be too far an intellectual leap to say, well, can we then package those and structure those in the same way as other futures-based ETFs?” 

Ether ETFs vs Bitcoin Futures 

Barton is right that ether futures share a lot of similarities with bitcoin futures. They’re both traded on the CME and are tied to the largest cryptocurrencies by market cap.  

The fact that the SEC was comfortable enough to let ETFs that hold bitcoin futures come to market in 2021 suggests it should be comfortable with ETFs that hold ether futures as well. 

After all, these aren’t spot ether ETFs we’re talking about; these are ETFs that would hold futures contracts that trade on a regulated exchange, just like the ProShares Bitcoin Strategy ETF (BITO) does. 

The manipulation concerns that have prevented spot bitcoin ETFs from launching shouldn’t apply to these funds.  

Reasons for Optimism  

That’s what gives Barton confidence in his filing for the Volatility Shares Ether Strategy ETF.  
 
“It’s just a filing. It’s not been scrutinized by the SEC yet, so we’ll go through that process over the next couple of months with the SEC,”[but] given the similarities with products that already exist, I think there is a very reasonable chance that we see this launch,” he told me. 
 
Barton’s optimism about ether futures ETFs aligns with what Blockworks reported earlier this month.  
 
“According to two sources who are directly familiar with the latest ether futures ETF filings, the SEC has indicated its readiness to publicly consider such a product,” Blockworks’ Ben Strack wrote.  
 
I didn’t ask Barton about any specific communication he’s had with the SEC about his ether futures ETF filing, but it makes sense that the regulator would be willing to consider this type of fund now. 

It's been about two and a half years since ether futures began trading on the CME and there’s consistently been volume of a few thousand contracts per day (equal to a notional value of a few hundred million dollars). 

Bitcoin futures ETFs didn’t launch until four years after bitcoin futures debuted on the CME, but you could make the case that the SEC might move faster the second time around.  

Is Ether a Regulated Security? 

Still, as Blockworks’ sources pointed out, the agency’s “willingness to weigh in on ether futures ETFs does not guarantee their approval.” 
 
Even Barton admitted to me that there are outstanding questions around “things [like] is ether a regulated security.” 
 
That, in my mind, is the biggest obstacle to getting any ether-linked ETF approved—futures-based or otherwise. Unlike bitcoin, which the SEC has said is unequivocally not a security, ether’s status is a lot more ambiguous.  

Ether’s 2014 initial coin offering would almost certainly be regarded as a securities offering by Gary Gensler’s SEC today.  

On the other hand, what began as a security could eventually become a different type of asset if the ecosystem that surrounds it is decentralized enough, according to other interpretations of securities law. 

Any approval or rejection of an ether futures ETF will either implicitly or explicitly have to grapple with the unresolved regulatory status of the world’s second largest cryptocurrency.