On May 23rd, the U.S. Securities and Exchange Commission (SEC) officially approved the Ethereum ETF, providing investors with a new opportunity to invest in Ethereum through traditional financial channels. This decision is seen as a significant endorsement of the cryptocurrency industry and becomes the second cryptocurrency ETF approved by the SEC after the Bitcoin ETF.
It is important to note that although several Ethereum spot ETFs, including BlackRock, Fidelity, and Grayscale, have been approved in the 19 b-4 form, the ETF issuers still need their S-1 registration statements to become effective before they can officially start trading. The SEC has just started discussions with the issuers regarding the S-1 form, and it is unclear how long this process will take, but Bloomberg analysts speculate that it may take several weeks.
After the approval, the price of Ethereum rose slightly and fluctuated around $3800, reaching a high of $3856. Currently, it is trading at $3807, with a 24-hour increase of 1.3%. The market had already anticipated the approval of Ethereum ETF, so the impact on the price was not as significant as in previous days.
This milestone event has seen a lot of changes this week. Since September last year, major fund institutions have been applying for Ethereum ETFs, including spot and futures ETFs. The earliest one was VanEck, which is why the SEC needed to make a decision on May 23rd. However, due to various reasons, the approval probability was not favored by the market.
But this week, Bloomberg analyst Eric Balchunas raised the probability of approval for Ethereum spot ETF from 25% to 75%. He said, “I heard some rumors this afternoon that the SEC might make a 180-degree turn on this issue (based on some political reasons), so everyone is preparing now.”
Furthermore, Fox reporter Eleanor Terrett stated that there are sources claiming that the development of Ethereum spot ETF is “evolving in real time.” In the current context, this means that the previously expected denial may change. Meanwhile, according to CoinDesk, the SEC has asked exchanges to expedite updates on the 19 b-4 filings for Ethereum spot ETF.
Three informed sources stated that SEC officials unexpectedly requested Nasdaq and the Chicago Board Options Exchange (CBOE) to quickly update and modify their filings for the Ethereum spot ETF. This requirement is usually made before approval, implying that the SEC may be preparing to approve the applications from these two companies. The SEC must decide whether to approve the listing applications for VanEck and ARK Investments/21 Shares ETF submitted by CBOE before this weekend. The exchange needs the SEC’s approval of its modified rules for the product to be listed, and the issuer still needs the SEC’s approval of the ETF registration statement to begin trading. Unlike the filing submitted by the exchange, the SEC does not have a specific decision timeframe, which means that it may take several more months for the Ethereum spot ETF to start trading.
It is important to note that most of the issuers involved in this approval have explicitly stated in their application filings that they do not include provisions related to collateralization. This is a necessary condition for the SEC to accept the Ethereum spot ETF.
In the final approval document, the SEC stated, “The proposal under consideration in this Order does not involve Ethereum staking by the Trust. Therefore, the relative advantages or disadvantages of staking are not within the scope of this Order. Any future actions taken directly or indirectly by the Trust involving Ethereum staking for Ethereum proof-of-stake validation or for earning additional Ethereum or generating income or other gains will require the exchange to submit proposed rule changes pursuant to Rule 19b-4.”
Whether Ethereum is considered a “security” has always been a hot topic in cryptocurrency legal discussions, especially after Ethereum transitioned from proof-of-work (PoW) to proof-of-stake (PoS), which made the issue more complex. In this model, users stake tokens to maintain the network and earn rewards, which touches on relevant provisions of the Securities Act. Recently, companies such as VanEck, Fidelity, and Grayscale deliberately removed the part about Ethereum staking in their amended S-1A filings submitted to the SEC. This indicates that the SEC may have found a clear boundary regarding whether Ethereum is considered a security: if the Ethereum in the ETF is not used for staking, it is not considered a security.
Previously, Scott Johnsson, a partner at Van Buren Capital and a financial lawyer, stated that the application filings indicated that the Ethereum spot ETF would still be listed under the “commodity-based trust shares” rule.
Jake Chervinsky, Chief Legal Officer at Variant Fund, stated that this means if the SEC approves the Ethereum spot ETF, it will have to acknowledge that non-staked ETH is not a security. This would be a major policy move for the SEC, which has previously refused to recognize any assets other than Bitcoin as non-security commodities.
At the same time, this move will immediately impact the cases between the SEC and major cryptocurrency exchanges. If ETH is not considered a security, then many other tokens may also be classified as commodities using similar logic, allowing cryptocurrency exchanges to win these legal cases.
There have been indications: Will the regulatory environment improve? Pressure in an election year
With the development of the U.S. political situation, the cryptocurrency industry, as an important voting group, is influencing the upcoming election competition. Former U.S. President Trump has stated that he will accept campaign donations in the form of cryptocurrencies and has openly criticized his opponent Biden for his lack of understanding of cryptocurrencies, implying that cryptocurrencies will become a focus of election debate. At the same time, Caixin reported that in the election year, the cryptocurrency community has become a political bargaining chip, and Biden may significantly change his attitude towards cryptocurrencies to prevent Trump from winning this group.
Haseeb Qureshi, a partner at Dragonfly, pointed out that the SEC’s attitude change towards the Ethereum ETF may reflect the Biden administration’s softer stance on cryptocurrency policies, aiming to avoid losing votes in the election due to seemingly minor cryptocurrency regulatory issues. This policy softening indicates that in the coming months, other regulatory agencies may also show a change in attitude, although it does not mean a complete policy reversal.
Two regulatory-related events this week: FIT 21 and SAB 121
There are two important signals this week regarding whether the current U.S. government is friendly towards the cryptocurrency industry:
The so-called FIT 21 bill, officially known as the “Financial Innovation and Technology for the 21st Century Act,” is a new legislation aimed at clarifying the regulatory framework for cryptocurrencies. The main purpose of this bill is to provide a secure and effective pathway for blockchain projects to launch in the United States, while clarifying the regulatory boundaries between the SEC and the Commodity Futures Trading Commission (CFTC). The bill also aims to clarify whether cryptocurrencies are regulated as securities or commodities, and enhance consumer protection by implementing specific cryptocurrency trading rules.
Currently, the FIT 21 bill has been formally passed by the U.S. House of Representatives on Wednesday. It will then enter the voting process in the Senate, and its final enactment depends on the President’s signature.
Previously, U.S. President Joe Biden announced that if the FIT 21 cryptocurrency bill is passed, he will not veto it.
SAB 121 is an accounting rule issued by the SEC in March 2022, requiring companies to classify customer-held cryptocurrencies as liabilities on their balance sheets. This rule is considered too strict by the cryptocurrency industry, as it hinders custodians or companies from holding cryptocurrencies on behalf of clients and is detrimental to the industry’s development. Therefore, there have been multiple lobbying efforts to overturn this rule.
In May 2022, the bill to overturn SAB 121 was passed by the U.S. House of Representatives with a vote of 228 to 182, and it passed again in the Senate with a vote of 60 to 38. The bill was then submitted to President Biden, who will make a decision before May 28th. Biden has three options: veto the bill, sign the bill into law, or let the bill automatically become law or be vetoed by delaying the decision. Although Biden had previously indicated that he might veto the bill, given the recent events and the election year, Biden may change his stance and choose to sign the bill.
It is important to note that this approval only applies to the 19 b-4 form, and the issuers still need to submit the S-1 registration form, which is a crucial document that covers the detailed operations and financial information of the ETF. The SEC’s review of the S-1 form is usually more rigorous and complex as it directly involves investor interests and market transparency. Therefore, even if the 19 b-4 form has been approved, the approval process for the S-1 form may take more time (60-120 days), which means that the final listing of the Ethereum ETF may still require a longer wait. At this stage, the SEC will carefully evaluate all legal, financial, and operational details in the proposal to ensure compliance with all regulatory requirements.