Ethereum ETFs Awaiting Decision This Week: Why Are Regulators Hesitant?
Cryptocurrency industry is eagerly anticipating May 23, when the US Securities and Exchange Commission (SEC) is set to announce its decision on VanEck’s spot ETH exchange-traded fund (ETF) application, followed by ARK 21Shares’ on May 24.
Besides VanEck, six other companies, including Ark Investment, Grayscale, Franklin Templeton, Invesco Galaxy, and BlackRock, have submitted applications, with Grayscale withdrawing its application at the beginning of May.
Approval of Ethereum ETFs would mean more institutional investment and the entry of significant market players. It could boost the market’s liquidity, which usually leads to more stable prices, making Ether more appealing to investors. Additionally, as ETF providers buy more cryptocurrency on the open market to meet demand, the market price of ETH might rise, similar to what happened with Bitcoin in January 2024. Eric Chen, CEO of Injective, told Cryptonews.com:
“The introduction of Ethereum ETFs is a significant nod to the crypto industry, signaling that this sector is here to stay and has the potential to drive further institutional adoption. By providing a regulated investment vehicle, these ETFs offer greater accessibility, transparency, and risk management tools for institutional investors.”
Until recently, the odds of approval were considered “slim to none,” as Eric Balchunas, an ETF analyst for Bloomberg, noted in his X post. However, on Monday the analyst wrote:
“James Seyffart and I are increasing our odds of spot ether ETF approval to 75% (up from 25%), hearing chatter this afternoon that SEC could be doing a 180 on this (increasingly political issue).”
The SEC urges exchanges to update their 19b-4 filings quickly. This move hints that the SEC might be preparing to approve these applications before an important deadline this Thursday, CoinDesk reports.
Amid the approval rumors, the Ether price surged from $3,000 to $3,560 and, at the time of writing, is trading at around $3,700.
Security or commodity?
One reason regulators are hesitant about Ethereum spot ETFs is whether Ether or staking ETH is considered a security or a commodity. This issue is central to an ongoing battle between the SEC and the Ethereum community.
For those unfamiliar, ETFs that hold commodities or currencies, like Bitcoin or gold, face different rules than those holding securities. Securities, such as stocks, are more heavily regulated because they represent an investment in a company or an ownership stake in a business.
“Past activities related to ETH staking have been classified as securities; however, there is ambiguity regarding the treatment of native ETH staking and ETH restaking activities,” Nitin Gaur, Managing Director at State Street Digital, told Cryptonews.com.
As reported by Fortune, the SEC was intensifying its scrutiny of Ethereum, issuing subpoenas to several US companies about their interactions with the Ethereum Foundation.ARK and 21Shares have recently updated their application for an Ethereum ETF by removing a small section about staking. This change was likely made to avoid regulatory issues and increase their chances of getting approved, although it means they will miss out on staking rewards.
Political shifts could reshape Ethereum ETF’s fate
While many experts continue to doubt the imminent approval of Ethereum spot ETFs, upcoming US elections and new regulations could shift the odds in case of denial. If Donald Trump were to win the presidency, it’s possible the SEC could see a leadership change to someone more favorable to cryptocurrency than the current chair, Gary Gensler.
Nitin Gaur explained in an interview with Cryptonews.com that legislative changes could clarify the status of digital assets.
“This could settle the ongoing debate about whether Ethereum (ETH) is considered a security. This could alleviate regulatory pressures on the broader Ethereum ecosystem, including wallets and DeFi protocols.”
JPMorgan analysts, led by Nikolaos Panigirtzoglou, earlier argued that the pattern may repeat that of Bitcoin: with futures-based Ethereum ETFs already approved, the SEC’s potential denial of spot Ethereum ETFs could trigger a legal challenge that it might ultimately lose.”There might eventually be a ‘middle’ category for Ethereum, neither a commodity nor a security but something in between,” JPMorgan analysts suggested to The Block.
Will ETH price decline if ETFs are denied?
Like the BTC spot ETF scenario, approval could spark a significant short-term asset influx into ETFs.
A denial could induce market volatility. However, “Market expectations may already reflect the possibility of denial,” says Nitin Gaur. He added in his conversation with Cryptonews.com:
“Hong Kong’s recent approval of the ETH Spot ETF with in-kind creation did not significantly affect prices, indicating other influencing factors. Price movements are also driven by utility and competition from other chains such as Solana, alongside the increasing complexity within the Ethereum ecosystem.”
