As the US Securities and Exchange Commission (SEC) nears its decision on spot Ethereum exchange-traded funds (ETFs), skepticism grows among crypto industry experts. They highlight concerns over the complex links between Ethereum (ETH) futures and spot markets and potential security issues.
This skepticism dims the outlook for these ETFs’ regulatory approval.
Potential SEC Roadblocks for Spot Ethereum ETFs Approval
Nate Geraci, President of the ETF Store, highlighted the necessity for SEC approval on both a 19b-4 change in trading rules and an S-1 registration statement for any ETF launch. However, the process may face delays, especially in S-1 approvals, even if 19b-4s get approval.
In a separate discussion, James Seyffart, an ETF analyst at Bloomberg Intelligence, expressed strong doubts about the approval of spot Ethereum ETFs. He pointed to the weak correlations between futures and spot markets observed in 2021.
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“Overall, I think it’ll be something somewhat objective that just kicks the can down the road. […] If I had to guess, I’d say correlations. Primarily pointing to the futures and spot correlations from 2021, which were quite weak over 1 min and 5 min intervals,” Seyffart said.
Seyffart further explained the possibility of the SEC by stating that “the futures market hasn’t been sufficient on a 3-year look back period for detecting fraud and manipulation in the spot market.” It is important to note that the same argument got the agency sued by digital asset manager giant Grayscale.
However, Seyffart emphasized that this is just a complete guess. He said a better timeline will be revealed “when we see these 19b-4 orders and the SEC’s official correlation analysis data.”
Proof-of-Stake Mechanism and Staking Complexities
Furthermore, security classification concerns form another significant hurdle. Scott Johnson, a general partner at Van Buren Capital, highlighted that the SEC is considering treating Ethereum as a security in the upcoming spot ETF order.
The current law requires the SEC to provide “notice of the grounds for disapproval under consideration.” This cited question was asked and noticed in all the Ethereum filings. Yet, Johnson believes the SEC never asked such questions when filing a Bitcoin ETF.
“The obvious purpose is to potentially deny on the basis that these spot filings are improperly filed as commodity-based trust shares and do not qualify if they are holding a security,” Johnson said.
David Han, an institutional research analyst at Coinbase, added another layer of complexity to the debate. In a recent report, he points out the differences between Bitcoin’s proof-of-work (PoW) and Ethereum’s proof-of-stake (PoS) mechanisms.
He mentioned the regulatory environment for asset staking remains unclear, especially for spot Ethereum ETFs that allow staking. Han argued that the risks associated with staking, such as slashing conditions, validator client variations, fee structures, and liquidity issues, make it unlikely for the SEC to approve spot Ethereum ETFs soon.
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This perspective aligns with recent adjustments by ARK Invest and 21Shares. The firms reportedly amended their spot Ethereum ETF application to remove clauses related to staking. Initially, they aimed to stake Ethereum (ETH) held by the firm, which would have counted as income for the fund.
The SEC’s upcoming deadlines to respond to spot Ethereum ETF applications from VanEck and ARK Invest are May 23 and 24, respectively. As the SEC deliberates, the crypto community watches closely. They are eager to see if the SEC addresses these hurdles or further delays the spot Ethereum ETFs’ introduction to the market.
