Understanding the ETH ETF Approvals

Just last week, you would have been hard-pressed to find anyone bullish on the probability of spot ETH ETF approval, but on Monday, rumors began circulating that the Securities and Exchange Commission (SEC) had begun meaningfully communicating with proposed ETF issuers.

Previously, a communication deficit between these groups had been taken as proof of imminent denial, but this new development caused Bloomberg’s ETF analysts to increase their odds of spot ETH ETF approval threefold to 75% and sent traders scrambling to long ETH!

While it was projected that the SEC would release a decision on the issue around the close of US stock markets at around 4 PM EST, Ether dumped 8% when this deadline arrived devoid of news, pushing ETH HODLers underwater on the daily for over an hour before the pump finally arrived… 

At 5:02 PM EST, it finally arrived: news wires reported that all proposed spot ETH ETFs had received approval, resulting in an immediate (but relatively modest) 4% rally in the price of Ether!

Despite hopes that spot ETH ETF approval would be a massively bullish catalyst, it appears that traders anticipating denial had already repositioned earlier in the week as markets began coming to consensus on approval, dampening the volatility surrounding the actual approval event.

Furthermore, the approval notice only concerned 19b-4 rule change filings from exchanges, only one of the two required documents for to the commencement of trading, and concerningly, the 19b-4 approvals were made on “delegated authority” (i.e. staff approved) by the SEC’s Trading and Markets Division, potentially due to Commissioner Crenshaw’s absence on maternity leave.

Delegated decisions can be challenged by a commissioner within 10 days, leaving some room for concern that this decision could eventually be walked back.

Thankfully, Bloomberg Senior ETF Analyst Eric Balchunas dismissed all concerns about the seemingly flimsy nature of approval, claiming that it is inevitable the S-1s will be approved and noting that many 19b-4s are approved via delegated decisions.

Without the SEC’s approval of S-1 registration filings from issuers, given that there is still a non-remote possibility for the SEC to revoke 19b-4 approvals, and considering the timeline for spot ETH ETFs to begin trading remains unclear, it may be somewhat of stretch to claim these instruments have been outright approved.

Nevertheless, it is overwhelmingly obvious that the regulatory progress is occurring, and moving in the right direction.

Through the approval of spot ETH ETFs, the SEC yet again confirms the non-security status of Ether, just as it did with the approval of commodity futures-based ETH ETFs last October!

Ethereum originated from an initial coin offering in 2014 that if conducted today in a similar fashion would be categorized an illegal security offering; the ability for ETH to achieve non-security status in spite of a security sale demonstrates that it is possible for a crypto network to sufficiently decentralize overtime and escape the purview of the SEC, giving all crypto a pathway to spot ETFs and listings on traditional exchanges.

Although many crypto market participants have already begun speculating on which asset is next in line for ETF approval, it is unlikely that any new listings will occur in the near future, as it appears the yearslong existence of regulated commodity futures on a digital asset is the prerequisite for spot ETF approval.

Key to the SEC’s approval of the 19b-4s was the fact that there are many years worth of data to support a high degree of correlation between the spot and Chicago Mercantile Exchange (CME) futures markets prices for ETH.

This strong mathematically proven correlation enables the presence of comprehensive surveillance sharing agreements between spot ETH ETF listing exchanges and the CME to satisfy the SEC’s requirements that crypto ETF have mechanisms to detect fraudulent and manipulative trades.

No crypto assets besides BTC or ETH currently trades on regulated futures exchanges, and although Coinbase had previously filed for DOGE, LTC, and BCH futures in March, these contracts are not currently trading, despite Coinbase’s intended April 1 launch date.

The exact qualities a digital asset must possess for CME futures listings are unknown, but the Commodity Exchange Act provides clarity that it must meet the definition of a “commodity.” 

Although Bitcoin and Ether are the only two digital assets that have been designated by the Commodity Futures Trading Commission (CFTC) as commodities at this time, ETH’s ability to progress from something with security-like properties into a commodity through decentralization opens the possibility for for any token to go through a similar transition!

Crypto has been little more than a fleeting afterthought for many policymakers throughout the past decade, but Congress produced multiple major legislative bills centered around the industry in recent weeks, one of which aims to provide clarity on how the labels of “commodity” and “security” should be applied to digital assets, and thus whether they fall under the respective jurisdictions of the CFTC or SEC.

The Financial Innovation and Technology for the 21st Century ACT (FIT21), is on its way to the Senate after receiving bipartisan support in the House this week and no threat of veto from President Biden, potentially clearing its way for implementation into law.

It gives the CFTC wide sweeping regulatory purview over “decentralized digital assets,” or tokens which no one single group controls greater than a 20% economic or voting stake that exist on blockchains where no single person has unilateral control over the network (i.e.; any distributed computing network).

While FIT21 provides clarity as to the types of digital assets we can expect to receive spot ETFs in the future, it concerningly “provides the CFTC with exclusive regulatory authority over cash or spot markets for digital commodities,” an unprecedented level of control for a regulator who typically only has authority over exchanges utilizing leverage in the absence of fraud and manipulation…