This week, Ethereum spot ETFs went from being highly unlikely to pass with a success rate of only 7% to suddenly skyrocketing to a 75% pass rate overnight. The price of ETH has also repeatedly broken through the $3,800 mark. Surprisingly, after the approval of Bitcoin ETFs four months ago, Ethereum ETFs were able to follow suit.
In the early morning of May 24th, Beijing time, the US Securities and Exchange Commission (SEC) approved the 19b-4 forms of multiple Ethereum spot ETFs, including those from BlackRock, Fidelity, and Grayscale. However, although the forms have been approved, the ETF issuers need to wait for the S-1 registration statement to become effective before trading can begin.
The SEC has just started discussing the S-1 forms with the issuers. It is currently unclear how long this process will take, but some analysts speculate that it may take several weeks.
In addition, there are six other Ethereum spot ETFs awaiting approval. Among them, the ARK 21Shares Ethereum ETF will be decided tomorrow night, followed by the Hashdex Nasdaq Ethereum ETF on May 30th, the Grayscale Ethereum Trust on June 18th, the Invesco Galaxy Ethereum ETF on July 5th, the Fidelity Ethereum Fund on August 3rd, and the latest iShares Ethereum Trust on August 7th.
However, it is important to note that this approval is limited to the 19b-4 forms. The final launch of the ETF requires the SEC’s approval of both the 19b-4 and S-1 forms. It may take several weeks to several months before the S-1 approval and the actual launch of the Ethereum ETF.
Joseph Lubin, the CEO of ConsenSys, stated in an interview that several 19b-4 applications submitted by companies like BlackRock will likely be approved by the SEC, but the approval of the S-1 forms is the key to the listing of these new ETFs and may cause a delay. Whether or not there will be a delay is currently unclear, but I guess it is now a significant political issue.
As the first Ethereum spot ETF, VanEck’s approval undoubtedly brings significant stimulation to the market. The price of Ethereum experienced a short-term large fluctuation earlier this morning, dropping to $3,523 and then briefly surpassing $3,900, with a volatility of over 10%. At the time of writing, the price is $3,811.
What challenges did the Ethereum spot ETF overcome? Securities attributes and PoS concerns.
For the past six months, the approval progress of Ethereum ETFs has been a concern for the community. After this approval, the previous negative views have been addressed. Unlike Bitcoin ETFs, the approval of Ethereum ETFs faced many obstacles.
Due to Ethereum’s ICO in 2014 and its fundraising, ETH may be considered as an asset with securities attributes. In addition, Ethereum theoretically has no upper limit on its total supply. Under the PoS mechanism, the issuance of ETH is related to network activity, and the actions of large holders can cause price fluctuations. According to Glassnode, approximately 55% of ETH supply is held by 1,041 addresses, which can significantly influence the upgrade and operation of the Ethereum network.
This concentration of ETH holders has led the SEC to believe that it increases the risk of market manipulation. Alex Thorn, the Director of Research at Galaxy Digital, was pessimistic about the approval of Ethereum ETFs due to this reason.
According to Alex’s report, the SEC has initiated an investigation into the Ethereum Foundation based in Switzerland following Ethereum’s transition to a new governance model called Proof of Stake (PoS) in September 2022. Although PoS can help Ethereum overcome the energy waste issue and use a model based on trusted validators, it provides a new excuse for the SEC to try to define Ethereum as a security.
As a compromise, companies applying for ETFs, such as Ark Invest, 21Shares, and BlackRock, have removed the staking part from their ETF proposals, indicating that they will not pledge the assets of the trust. This measure reduces the risk of ETH being considered a security, as staking may involve expectations of future returns, which is a characteristic of securities.
The prelude to the Hong Kong Ethereum spot ETF.
Looking back at the cryptocurrency market over the past year, Ethereum has appeared relatively weak compared to Bitcoin. Its price and growth rate are not as good as Bitcoin or altcoins. During this period, Hong Kong gradually transformed into a more crypto-friendly policy stance, leading to the approval of the Ethereum spot ETF ahead of the United States, which brought great benefits to Ethereum.
On April 15, 2024, the Hong Kong Securities and Futures Commission officially announced the list of approved virtual asset spot ETFs, including Bitcoin spot ETFs and Ethereum spot ETFs under the management of Huaxia (Hong Kong), China International Capital Corporation, and Bosera International.
These six spot ETF products started their subscriptions on April 25th to 26th and were listed on the Hong Kong Stock Exchange on April 30th. This was also the first time for an Ethereum spot ETF to be listed on a major exchange.
Currently, Hong Kong’s spot cryptocurrency ETFs are mainly issued by Huaxia Fund (Hong Kong), Bosera Fund (International), and China International Capital Corporation. They include Bosera HashKey Bitcoin ETF (03008), Bosera HashKey Ethereum ETF (03009), Huaxia Bitcoin ETF (03042), Huaxia Ethereum ETF (03046), China International Capital Corporation Bitcoin Spot ETF (03439), and China International Capital Corporation Ethereum Spot ETF (03179).
In the community’s research and analysis, the reason why Hong Kong approved the Ethereum spot ETF earlier than Europe and the United States is not only due to its flexible regulatory environment and open attitude towards financial innovation but also influenced by strong market driving forces, geographical and strategic advantages, and the desire to seize pricing power.
Although many community members were initially not optimistic about this matter, believing that it did not have much impact from a market perspective, the SEC’s dramatic change in attitude towards Ethereum and the approval of VanEck’s application is seen as a huge victory in such a crazy market. Perhaps, as Kong Jianping, a director of Hong Kong Cyberport, said, “Hong Kong’s approval of the Ethereum ETF is a lifesaver for Ethereum.”
What impact will the approval of the Ethereum spot ETF have?
The approval of the Ethereum spot ETF may come as a surprise. Unlike the Bitcoin spot ETF, investors were already positioning themselves six months before the approval of the Bitcoin spot ETF, resulting in massive capital inflows. However, the approval of the Ethereum spot ETH is still a milestone event for the cryptocurrency industry, and its impact lays a positive foundation for the future development of the industry.
Will altcoins be saved?
The most direct impact of the approval of spot ETFs will be reflected in the price. Bitcoin’s price increased by 75% after the approval of the spot ETF, and the impact on ETH’s price can be seen after the approval of the Ethereum spot ETF. However, the news of the approval of the Ethereum ETF did not immediately shake the altcoin sector, and there was a slight decrease compared to the previous few days.
Geoff Kendrick, Head of Foreign Exchange Research and Digital Asset Research at Standard Chartered Bank, stated, “After approval, we expect the spot Ethereum ETF to attract a flow of 2.39 to 9.15 million ETH in the first 12 months after approval.” He added, “In terms of USD, this is equivalent to approximately $15 billion to $45 billion in assets.”
Kendrick also added, “Considering that we now see Bitcoin reaching levels of $150,000 by the end of 2024, this means that the price of Ethereum will reach $8,000.”
In addition to impacting the price of ETH itself, the Ethereum spot ETF will also have a positive impact on the altcoin market. This is because the majority of altcoins in decentralized exchanges (DEX) are traded against ETH, and the rise in ETH will lead to passive rises in altcoins.
Furthermore, some market perspectives believe that with the approval of the Ethereum spot ETF, there will be strong implications for more cryptocurrency ETF applications in the future.
Changes in cryptocurrency regulation
Another important impact of the approval of the Ethereum spot ETF is the change in the attitude of US regulatory agencies towards cryptocurrency policies.
As the US election unfolds, the inclinations of the Democratic and Republican parties towards the cryptocurrency industry are worth noting.
Previously, Nancy Pelosi, the former Speaker of the US House of Representatives, was considering supporting the FIT21 cryptocurrency bill, which is supported by the Republican party, when the House voted this week. In addition, there is also a bill on cryptocurrency accounting standards, SAB121, which will be decided soon.
After the approval of the Ethereum spot ETF, the mainstream view in the market is that it has brought positive effects to the regulatory environment of cryptocurrencies.
Previously, Alex Thorn, the Director of Research at Galaxy Digital, stated that the SEC’s regulatory attitude towards Ethereum would try to find a balance between the fact that “ETH” itself is not a security and that “staked ETH” (or, more loosely, “staked ETH as a service”) is a security.
This is highly similar to the demands in the FIT21 bill, which is to clarify which digital assets are regulated by the Commodity Futures Trading Commission (CFTC) and which are regulated by the Securities and Exchange Commission (SEC). This is important because there are critical differences in the definitions of “commodity” and “security,” which will affect their regulatory approaches.
In conclusion, as a category of digital assets with smart contracts, the approval of the Ethereum spot ETF will have a profound impact on the cryptocurrency industry.
