(Bloomberg) — The Securities and Exchange Commission paved the way for the eventual launch of the first US exchange-traded funds investing directly in the Ether token, putting the crypto industry on the cusp of a major landmark.
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The SEC signed off on a proposal by venues run by Cboe Global Markets Inc., Nasdaq and the New York Stock Exchange to list products tied to the second-biggest digital asset — a step that had seemed unlikely through last week.
Thursday’s events remove a key hurdle for US spot-Ether ETF trading. Issuers now need a separate sign-off from the agency. No deadline has been set for that decision. Ether rose 1.5% to $3,810 as of 8:56 a.m. on Friday in Singapore amid a 24% surge this week driven by signs that approvals were on the way.
The latest developments are a major milestone for crypto, said Rich Rosenblum, president of liquidity provider GSR Markets Ltd. Referring to the abrupt pivot toward approval, Rosenblum said “in the 12 years I’ve been trading this space, this is the most incredible thematic whipsaw I can remember.”
First-Mover Advantage
Firms such as VanEck, ARK Investment Management, BlackRock Inc. and Fidelity Investments are vying for first-mover advantage in the race to launch a spot-Ether ETF. Their interest has been piqued by the $58 billion amassed by Bitcoin ETFs since the SEC’s green light for those products at the start of 2024.
The SEC’s order echoed the one it issued in January clearing exchanges to list Bitcoin ETFs, including a lengthy discussion of correlations between the Ether spot market and futures tracking it that are hosted by CME Group Inc. in Chicago. How closely the two markets move is a crucial point for regulators who want CME surveillance systems to spot trading anomalies before they spiral.
Coinbase Global Inc. proffered a study showing correlations among spot and futures markets for Ether were about 85% over one-minute intervals between March 2021 and January 2024, which it said was higher than the one cited in the Bitcoin review. The SEC said it replicated that and other studies and found they “provide empirical evidence that prices generally move in close (although not perfect) alignment” between the spot and CME Ether futures markets.
Wider Implications
Beyond ETFs, the latest developments may have wider policy implications. SEC Chair Gary Gensler has been ambiguous on whether Ether is a security, and crypto enthusiasts are worried about the token — and potentially projects based on the Ethereum blockchain — falling under the agency’s tough and costly rules.
The Commodity Futures Trading Commission, the US regulator with jurisdiction over derivatives, has signaled that it doesn’t view Ether as a security. The CFTC has for years allowed trading in Ether futures by CME Group.
Lee Reiners, policy director of the Duke Financial Economics Center at Duke University, said that exchange bids to list the products were based on Ether being a commodity and not a security. An SEC decision to green light the plan bolsters the view that the SEC still considers Ether not to be a security, he said.
As recently as last week, companies expected the SEC to reject the Cboe plan — and potentially others — by Thursday’s deadline. Additional SEC approval is still needed for the issuers. Backers hope eventual listings will woo money from retail and institutional investors who are reassured by the ETF wrapper.
In a note of caution, Lara Crigger of data provider VettaFi said she doubts Ether ETFs can attract the same scale of inflow as Bitcoin products. “Although Ether has more use cases, it’s a much smaller market than Bitcoin, with lower awareness and name recognition among the general investing public,” she said.
Chequered History
The digital-asset industry has been recovering over the past year or so from a 2022 market rout and a spate of scandals, such as the huge fraud at Sam Bankman-Fried’s collapsed FTX exchange and his subsequent jailing. Demand for US Bitcoin ETFs helped drive the cryptocurrency to a record high in March.
Some of that rally is due to optimism that a US crackdown may be waning. The Republican-led House this week advanced sweeping crypto legislation despite opposition from the White House and Gensler. The Senate isn’t expected to approve the measure but it garnered some Democratic support in the House.
Asset managers have been making concessions to win SEC approval, notably on so-called staking — the process of earning rewards for blockchain maintenance. Fidelity Investments said it will keep the Ether it buys as part of the ETF out of such programs.
Staking is a key issue for Ether because it raises questions about whether the token should be treated as a security. Last year, the SEC in a lawsuit accused Coinbase of breaking its rules by offering staking services.
–With assistance from Isabelle Lee, Ben Bain, Michael P. Regan, Muyao Shen, Ryan Weeks, Olga Kharif and Chris Nagi.
(Updates with market-maker’s comment in the fourth paragraph.)
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