SEC Changes Ethereum Rule, Sets Stage for ETF Approval

The Securities and Exchange Commission on Thursday approved a rule change that sets up proposed spot Ethereum ETFs for final approval.

The SEC must still approve the S-1 registration statements, but observers of the process have said such approvals are generally a formality. 

The announcement on Thursday on the agency's website seemed unlikely barely a week ago and underscores the growing demand for cryptocurrency-based investments. 

The decision affects funds proposed by VanEck, BlackRock, Fidelity, Bitwise, Ark 21 Shares, Grayscale. These new products will be based on the ongoing price of ether the native cryptocurrency of the smart contracts Ethereum blockchain. Existing ether-based ETFs are based on futures contracts. 

"This approval order is based on all of the Exchanges’ representations and descriptions in their respective amended filings, which the Commission has carefully evaluated," the SEC said in the filing. "For the reasons set forth above, including the Commission’s correlation analysis, the Commission finds that the Proposals are consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange

Ether fell about 5% since the announcement, to about $3,710 this morning after was recently trading hands at about $3,820 shortly after the SEC statement last night, according to crypto markets data provider CoinMarketCap. The second largest digital asset behind bitcoin in market capitalization has risen more than 30% over the past week with much of the gains coming after the SEC signaled a willingness to approve the rules change. In the days before Thursday's announcement, the agency asked issuers to amend the 19b-4 forms to address concerns about investor protections and regulatory oversight. 

The updated applications have eliminated staking rewards, a high-risk strategy in which investors use ether as collateral to validate transactions on the blockchain. 

VanEck, Ark 21/Shares September Filings

VanEck and Ark/21 Shares filed their spot Ethereum proposals on Sept. 6. Seven other issuers filed their applications in the ensuring seven months, including Grayscale, BlackRock, and Fidelity, whose slightly more than four-month-old spot bitcoin funds are the largest by assets under management. The 11 spot bitcoin funds have generated about $13 billion in inflows. 

Despite the spot bitcoin funds' success, investors and analysts doubted that the SEC would greenlight VanEck's and other spot ether-based funds—at least any time soon.

The agency had been concerned that spot Ethereum ETFs are vulnerable to market manipulation and fraud, which agency Chairman Gary Gensler has argued plage digital assets, and which presented an obstacle to spot bitcoin approvals. But amid robust demand and shifting political winds that have seen once crypto-shy Democrats join Republicans in support of digital asset-related investments, the SEC seemed to become more receptive to the products based on ether's price. 

Grayscale praised the decision in a statement.

"At Grayscale, we appreciate the opportunity to engage constructively with regulators as they review spot Ethereum ETFs, and we remain optimistic about the potential of bringing Ethereum further into the US regulatory perimeter in the ETF wrapper," a company spokesperson said.

But in a note to etf.com, Peter Eberle, president and chief investment officer of Lafayette, Calif.-based digital asset fund manager Castle Funds, wrote that he was "surprised" by the SEC decision and was uncertain about investor interest in the products. 

"As a long-term investor in ETH, we stake our ETH, which earns us about 3%," he wrote. "These ETF’s will not be allowed to stake."

He added: "I also don’t believe that institutional investors need to add ETH to their portfolio since it is highly correlated to BTC. If they allocate 1-3% to crypto, do they really need both BTC and ETH? I am bullish on ETH despite my skepticism of ETH ETFS."