Forbes: Is Bitcoin's surge a boon or a trap for Ethereum ETFs?
Original article by Steven Ehrlich, Forbes staff
Original compilation: Luffy, Foresight News
The spring of the crypto world has arrived early. Bitcoin is trading above $60,000, up more than 167% in the past 12 months. In less than two months since the launch of spot Bitcoin exchange-traded funds (ETFs), more than $7 billion has flowed into these new funds. Subsequently, the market is full of expectations for the listing of spot Ethereum ETF. ETHs current market value exceeds US$400 billion, second only to Bitcoin, which has a market value of more than US$1.2 trillion. In May, the U.S. Securities and Exchange Commission (SEC) may make a final ruling on nine spot Ethereum ETF applications. But unlike the passage of the Bitcoin ETF in early January, which seemed to be an established fact, the future of Ethereum is far less clear.
The most immediate concern is whether the SEC considers Ethereum to be a security, meaning it will be registered and regulated with the SEC under the Investment Company Act of 1940. Most ETFs, such as the QQQ or the SPDR SP 500 Trust, fall under the purview of the so-called 40 Act because they are a combination of stocks or registered securities. Although cryptocurrency trading and activity may appear to be very similar to securities markets, the crypto-asset community agrees that the thousands of different cryptocurrencies behind the emerging industry worth more than $2 trillion are not securities. In fact, they bristled at the idea that cryptocurrencies are securities, calling it anathema to the decentralized ethos that launched Bitcoin 15 years ago. These beliefs were confirmed to some extent when the SEC approved spot Bitcoin ETFs in January after more than 10 years of waiting under the Securities Exchange Act of 1933, which recognized the Bitcoin underlying these funds as a commodity.
The SEC has so far avoided discussing whether Ethereum is a security, although it claimed in a June 2023 case against Coinbase that many tokens, including those associated with blockchains like Cardano and Solana (which are essentially Ethereum The tokens related to the clones of Fang are essentially securities. SEC Chairman Gary Gensler has remained silent on the issue of whether Ethereum is a security. At a congressional hearing in June 2023, House Financial Services Committee Chairman Patrick McHenry asked Gensler whether Ethereum was a security or a commodity. The most common thing Gensler said at the end of a controversial discussion was I dont think you want me to prejudge...
If the SEC determines that Ethereum is a security, it will insist that Ethereum ETF issuers treat it as such in their approval applications. While this may seem like nothing more than a pile of legal paperwork, doing so would be an insult to crypto industry insiders and idealists and call into question the status of thousands of cryptocurrencies. However, given the potential multi-billion dollar bets on the first mover in the emerging cryptocurrency ETF market, companies that can quickly gain market share like Bitcoin ETFs such as Blackrock, Invesco, Fidelity and others may benefit from the SECs ruling.
“Ultimately, we will file under whatever jurisdiction or regulation the SEC wants,” said one applicant who requested anonymity.
After Bitcoin, Ethereum, created in 2015 by Vitalik Buterin and others, is the second most important blockchain in the world. What differentiates it from Bitcoin is that it allows developers the freedom to create countless applications that run on it, often called smart contracts. Its success is critical to a vast ecosystem of companies like Nike, Circle, Uniswap and Blur, which have businesses ranging from payments to decentralized finance and gaming to NFT applications. In terms of market performance, the price of Ethereum has doubled in the past 12 months.
Ethereum’s origin story is significantly different from Bitcoin’s, which has piqued the interest of SEC attorneys. Bitcoin was launched in 2009, and the developer behind the pseudonym Satoshi Nakamoto mined the first so-called block, and then anyone could join the network and become a miner, without any pre-allocation for the founder. Mine and earn new Bitcoins. In contrast, Ethereum was crowdfunded in the form of an initial coin offering in mid-2014, with the founding team led by Vitalik Buterin retaining some of the 72 million ETH created at launch. In many ways, Ethereum’s ICO is similar to how a company’s founders issue stock in an initial public offering.
One of the determining factors in determining whether something is a security has to do with centralized control. In the early days of Ethereum, the peer-to-peer network was controlled by a small group of developers. However, over time, Ethereum and its governance became increasingly decentralized.
Bill Hinman, who served as the SEC’s corporate finance director in 2018, said: “Leaving aside the financing activities during the creation of Ethereum, based on my understanding of the current situation of Ethereum, the Ethereum network and its decentralized structure, Ethereum is currently The issuance and sale of securities are not securities transactions.
Another conflicting signal comes from Ethereum futures ETFs launched last fall, such as VanEck’s Ethereum Strategy ETF and ProShares’ Ether Strategy ETF. “If the SEC was going to take the position that Ethereum is a security, one would have expected it when they allowed Ethereum futures funds to launch last year because the ETH futures held by these funds are specifically regulated as a commodity by the CFTC. , not securities futures, said Greg Xethalis, general counsel at crypto venture capital firm Multicoin Capital. On the other hand, New York-based Prometheum is the only broker-dealer registered with Finra and has obtained a special license to custody and trade digital assets. Prometheum plans to launch custody and trading services for Ethereum as a crypto-asset security this spring.
Aaron Kaplan, CEO of Prometheum, believes that Ethereum is a security. If you think about it, Gary Gensler has been saying that almost all cryptocurrencies other than Bitcoin are securities.
The potential profits for the issuer of the first spot Ethereum ETF could be significant. In October 2021, ProShares launched its first Bitcoin futures ETF, called the ProShares Bitcoin Strategy ETF (BITO), two weeks ahead of its competitors. On its first day of release, it brought in over $1 billion in inflows, and it has dominated cryptocurrency futures ETFs ever since. BITO has $2 billion in assets, charges 0.95% annual fees, and has 90% market share. GBTC was an early mover in the Bitcoin fund space, and despite its 1.5% expense ratio (more than four times that of its spot Bitcoin ETF competitors), it still maintains market dominance with $26 billion in assets, while Its second largest competitor, BlackRock, is at $9 billion.
If this potential advantage isnt enough, there are additional incentives. Spot commodity ETF applications filed under the Securities Exchange Act of 1933 have a 240-day deadline or approval period for careful consideration by the SEC. These types of filings require the listing exchange (such as Nasdaq or the New York Stock Exchange) to file a separate form called 19-b 4 in addition to the Form S-1 for the new securities offering. Giang Bui, head of U.S. equities and ETPs at Nasdaq, said the filings were reviewed by two different divisions of the SEC and followed different timelines. S-1s are reviewed by the SECs Division of Corporate Finance, and 19-b 4s are reviewed by the SECs Trading and Markets Division.
If a spot Ethereum ETF application is filed under the 1940 Act, the issuer only needs to submit Form N-1a as its registration statement, which is reviewed by the SECs Investment Management Division. This streamlined approach means that Bill 40 applications take 60 days instead of 240 days to become effective. On Wall Street, that shortened window of time can make or break an IPO.
For the broader crypto industry, approval of an Ethereum spot ETF under the 1940 Act could wreak havoc on the market, especially in the Ethereum spot market. The cryptocurrencys pricing mechanism may be questioned because many of the key exchanges that determine prices, including Coinbase and Kraken, are not registered or authorized to trade the securities. When Ripples token XRP was sued by the SEC in December 2020, several exchanges including Coinbase and OKCoin delisted the digital asset. Given Ethereums importance, few expect ETH to be delisted from exchanges, but this could hurt market demand. The smooth operation of deep and orderly markets is a key component of any ETF application. Coinbase is a particularly prominent player in this drama, as it is positioned to provide custody and prime brokerage services for new cryptocurrency ETF products. In fact, the company’s chief legal officer Paul Grewal sent a letter to the SEC at the end of February, imploring it to approve the current Ethereum spot ETF application. Grewal asserted in the letter: “Ethereum is a commodity, not a security.”
With nearly three months until the SEC is required to rule on the current spot Ethereum ETF application, it’s difficult to tell which view will ultimately prevail. “The challenge we face is that the CFTC said Ethereum is a commodity, and the SEC previously said Ethereum is a commodity, and now under the new administration, It also says that Ethereum can be a security, said Annemarie Tierney, a lawyer at cryptocurrency advisory firm Liquid Advisors. She also noted that the SEC notably excluded Ethereum from its securities violation lawsuits against Coinbase, Kraken and Binance. “In any enforcement action against the exchange, they have not classified Ethereum as a security, so I don’t know what to make of that.”
Regardless, don’t expect potential spot Ethereum ETF issuers to be wedded to the crypto industry’s ideals. “The SEC has done inconsistent things in the past,” said one applicant who has launched a spot Bitcoin ETF on the market. . “If they say we can only bring a spot Ethereum ETF to market under the 1940 Act, then we will definitely keep that option open.”
