Author: Daniel Kuhn, CoinDesk; Translated by: Deng Tong, Jinse Finance
The U.S. Securities and Exchange Commission (SEC) has approved important rule changes to allow exchange-traded funds to hold Ethereum’s native token, ETH.
I never understood why SEC Chairman Gary Gensler would insist on approving these spot ETH products, given his embarrassment in actively pursuing a Bitcoin ETF listing.
Recall that the three-judge panel of the Court of Appeal called the SEC’s reasons for rejecting (and denying and denying) a spot Bitcoin fund “arbitrary and capricious” because it had already approved a Bitcoin futures product that essentially does the same thing. The same could be said for ETH, and some companies may well be happy to litigate the matter in the same way that Digital Currency Group is fighting against a Bitcoin ETF.
This time, the SEC’s decision appears to be just as arbitrary, just in the opposite direction. Hours before the approval was made public, Gensler told CoinDesk’s Jesse Hamilton that he would follow “how the courts interpret the law” and that “the D.C. Circuit took a different view, and we took that into account and adjusted.”
So why now? What does this mean for the future of Ethereum? And does this bode well for other cryptocurrencies?
Is the decision politically motivated?
As many have already noted, the regulatory landscape for cryptocurrencies appears to have changed dramatically. On Thursday, the House of Representatives took a historic vote to approve the most substantial cryptocurrency legislation to date. Prior to this, both chambers of Congress voted to repeal the controversial SEC cryptocurrency custodian accounting rules.
The U.S. government’s long war on cryptocurrencies appears to be coming to an end, as Democrats are heavily involved in both bills. Notably, President Biden announced that he would not veto FIT21, the cryptocurrency market structure bill that the White House formally opposed — a pretty significant concession.
All of these events may have served as a test bed and helped Gensler believe that his stance on cryptocurrencies was becoming a political risk . After all, former President Donald Trump had just announced his strong support for cryptocurrencies — and the SEC allegedly rejected an Ethereum ETF after failing to hold a “productive” meeting with the applicant.
To be sure, the SEC is not approving an Ethereum ETF anytime soon, but rather approving 19b-4 proposals from CBOE, NYSE, and Nasdaq, which will allow the funds to go public once the S-1 filings from Ark Invest, Bitwise, BlackRock, Fidelity, and Grayscale, among others, are approved. That could take months.
What does this mean for Ethereum?
First, the launch of a spot ETH fund means that more institutions may soon be interested in the second-largest cryptocurrency. Not only does the move serve as a kind of approval, but it also creates a familiar entry point for any retail investors and hedge funds (primarily in the United States) looking to diversify their 401(k)s to buy into the asset. Just like a Bitcoin ETF.
“Many were caught off guard by the Ethereum ETF announcement. While the Bitcoin ETF creates a crypto ETF roadmap for large registered investment advisors, I still expect many institutional stakeholders are now scrambling to educate their sales teams on the state of Ethereum and build the appropriate infrastructure,” said Michael Anderson, co-founder of Framework Ventures, in an emailed statement.
While ETFs are really just a tool to gain exposure to the underlying asset, these funds actually have the potential to attract more users to invest in Ethereum itself. One scenario is that since the SEC may not allow fund managers to stake the underlying ETH, new Ethereum investors may decide to do it themselves to earn an additional yield of about 3.5%.
Relatedly, as Variant Chief Legal Officer Jake Chervinsky noted on X, the approval may answer a lingering question: whether ETH is a security. Chervinsky said that if the funds are allowed to trade, this could mean that unstaked ETH would not be considered a security by the agency. Considering that many institutions are currently holding off on investing simply due to regulatory uncertainty, this in itself could spur more institutions to enter the market.
From a more technical perspective, there are a lot of unanswered questions about what this means for Ethereum in a world where these funds buy as much ETH as the Bitcoin ETF (assuming they are as popular as the Bitcoin ETF). To the extent that buying pressure is high, it will be significant for the network and other Layer 2s.
Ethereum has built in a burn mechanism where tokens are destroyed for every transaction, which has been deflationary for the asset class for a long time. However, with the growing popularity of blockchains like L2 and Solana, Ethereum transaction volume has fallen to the point where the ETH supply is growing again, which has had a long-term impact on the price and demand for the asset. ETFs can help support the economics of ETH.
Finally, it will be interesting to see how these funds impact the staking economy. Some have been sounding the alarm about the amount of ETH being staked, and now apps like Lido make it easy for people to lock up even small amounts of cryptocurrency. These concerns could be compounded by the potential for ETFs to take more ETH out of circulation.
What does this mean for blockchains like Solana?
As mentioned earlier, the approval of an Ethereum ETF is in some ways a validation of Ethereum and could also be an opportunity for the chain to lock in its already dominant position.
“Assuming an Ethereum ETF sees a fraction of the institutional flow that a Bitcoin ETF sees, I think it’s entirely possible that Ethereum will solidify as the undisputed leader in decentralized application platforms over the next few years, at least in terms of market share and valuation,” Anderson said.
But the move could also open the door for blockchains like Cardano, Solana, and Ripple to move further into high-end finance. Of course, Bitcoin and ETH have an easier time (in the long run) because financial giants like CME have embraced them. Ethereum futures have been available at CME for three years, and it’s unclear whether other crypto assets are being considered.
It’s also worth noting that while the SEC has hinted that it considers ETH to be a security, the agency has proactively come out and said that assets like SOL, ADA, and ALGO meet the definition outlined by the Howey test used to determine whether something is an investment contract. This could be an important step on the road to a spot SOL ETF.
