Key Points
The crypto community is eagerly awaiting the United States Securities and Exchange Commission’s (SEC) ruling on a spot Ether exchange-traded fund (ETF), which is due in a day’s time.
The SEC’s final deadline for deciding on VanEck’s spot Ether (ETH) ETF application is set for May 23.
As the second-largest cryptocurrency after Bitcoin (BTC), Ether is on the verge of a key milestone, with the SEC’s view of Ether as a commodity or a security being a pivotal factor.
Uncertain Outlook for Ether ETF
On January 10, the SEC approved spot Bitcoin ETFs, thereby cementing BTC’s status as a commodity.
However, the future of an Ether ETF is less certain, as the SEC is once again scrutinizing whether ETH is a security, leading to a more pessimistic forecast regarding the ETF’s chances of approval.
Bloomberg ETF analyst Eric Balchunas recently downgraded the probability of a spot Ether ETF approval from 70% to a “very pessimistic 25%.”
The main obstacle to spot Ether ETFs is an ongoing probe by the head of the SEC’s Division of Enforcement, Gurbir Grewal, into Ether’s security status.
In March, the SEC formed a five-member commission approved by the Division of Enforcement’s “Ethereum 2.0” investigation on April 13, 2023.
Consensys, a Blockchain and Web3 software firm, filed a lawsuit against the securities regulator in April, challenging its authority to regulate Ether as a security.
Jamie Wright, a legal expert and the CEO of the Wright Law Firm, was asked about the jurisdictions of U.S. regulatory bodies.
In the event of a conflict of interest between the SEC and the Commodity Futures Trading Commission (CFTC), Wright believes the SEC may prevail due to its more comprehensive investor protection regulation, which is a high priority for the SEC.
SEC Chair Gary Gensler’s vote was instrumental in the approval of spot BTC ETFs, leading many to believe his vote may have sealed their approval.
However, internal documents suggest that Gensler thinks Ether is a security, which could be a determining factor against approving a spot Ether ETF.
Finance lawyer Scott Johnsson stated that the SEC “is considering the security question for ETH in this upcoming spot ETF order.”
Johnsson further suggested that the purpose of this query could be to “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.”
Adam Berker, senior legal counsel at global payments platform Mercuryo, stated that the SEC and Gensler have consistently emphasized their stance of treating all digital tokens apart from Bitcoin as securities.
He added that the SEC singled out Bitcoin because it lacks a central authority that oversees it, which complicates the regulator’s approach.
The ability for ETH holders to earn staking rewards from the network is another reason the SEC believes it could be a security.
With Ethereum’s proof-of-stake (PoS) protocol, validators are chosen to create new blocks and validate transactions based on the number of coins they hold and are willing to “stake” as collateral.
Rewards are distributed based on the amount staked.
PundiX CEO Peko Wan stated that while the move to PoS introduces elements that could align with the Howey test criteria for an investment contract, it does not mean that ETH will be classified as security.
On May 22, possibly in anticipation of the challenges that staking could pose to SEC approval, five ETF applicants submitted amended filings removing language regarding staking.
Many experts believe that the upcoming U.S. presidential election could play a crucial role in deciding the fate of spot Ether ETFs.
Kadan Stadelmann, chief technology officer at Komodo, stated that cryptocurrency has become a growing issue this election season, especially in light of former president Donald Trump’s advocacy for crypto assets.
He added that a change in government could potentially usher in a new era for cryptocurrency and regulations amid increasing institutional demand.
However, experts caution that Trump’s advocacy might not mean much after the elections.
Some in the crypto community celebrated Gensler taking charge of the SEC as a win for crypto, citing his background and understanding of the crypto space.
However, as SEC chair, he has taken what many in the crypto space have characterized as a hard line against the industry.
Wright stated that a new administration might change policy priorities and regulatory approaches, potentially “influencing how the SEC and other regulators view Ether.
He added that “shifts in key regulatory positions and the overall political climate could lead to a reevaluation of current stances, making the regulatory environment for cryptocurrencies more dynamic and subject to change.”
