SEC Approves Spot Ethereum ETFs

The U.S. Securities and Exchange Commission (SEC) has just approved the first batch of spot Ethereum (ETH) ETFs. These ETFs could have huge implications across financial markets, given the popularity of the asset and acknowledging how spot Bitcoin ETFs were the fastest growing ETFs in the history of ETFs, according to BlackRock CEO Larry Fink.

The newly approved spot Ethereum ETFs will allow investors to gain direct exposure to Ethereum, the second-largest cryptocurrency by market capitalization, without having to purchase and store the digital asset themselves.

“TO BE CLEAR: This does not mean they will begin trading tomorrow. This is just 19b-4 approval. Also needs to be an approval on the S-1 documents which is going to take time,” Bloomberg ETF analyst James Seyffart commented on the news. “We’re expecting it to take a couple weeks but could take longer. Should know more within a week or so!”

The rapid change in approval odds for these ETFs shocked everyone this past Monday, when Bloomberg analysts Eric Balchunas and James Seyffart raised their approval odds from 25% to 75%. “Hearing chatter this afternoon that SEC could be doing a 180 on this (increasingly political issue), so now everyone scrambling (like us everyone else assumed they’d be denied),” Balchunas explained. 

It has been a long debate on whether Ethereum should be deemed as a security or a commodity. Critics of Ethereum claim it passes the Howey test, and therefore should be classified as a security. The Howey test consists of four criteria: an investment of money, expectation of profits, common enterprise, and reliance on the efforts of others. Here is a video below from 2014 of current SEC Chair Gary Gensler explaining why he believed at the time that ETH passes the Howey test.

And now due to recent regulatory developments, along side this ETF approval, regulators appear to now be pushing towards regulating ETH as a commodity.

Yesterday, a bill to develop a regulatory framework for digital assets (H.R. 4763 – Financial Innovation and Technology Act 21 (FIT 21)) passed the House. The bill, unlike another Bitcoin and crypto related bill voted on in the House and Senate earlier this month, received positive feedback from the White House, initially saying they did not like the legislation in it’s current state but wanted to work with Congress to find a resolution, and would not veto it shall it get to President Biden’s desk to sign into law.

“We had two thirds of the House of Representatives vote in favor of clarity for crypto,” Patrick McHenry, Chairman of the U.S. House Committee on Financial Services Republicans, told CNBC today. “It creates a legal framework, giving the SEC a proper role, and the CFTC a proper role, rather than the set of conflicting regulatory actions that those two agencies have taken over the last ten years…It settles what is a digital asset, gives it a legal framework for trading and the purchase of those assets.” 

If FIT 21 passes the Senate and gets signed into law by President Biden, then ETH could be classified as a commodity under these new guidelines, but it remains to be seen the official outcome of that decision.

Congress is also currently “building a pro-crypto army”, according to US Senator Cynthia Lummis, who shared her support for the House passing FIT 21 yesterday.