Is political pressure playing a role in the SEC’s consideration of spot Ether ETFs, and what implications does this have for the crypto community?

Ethereum (ETH) has been on a bullish run, trading around $3,760 as of May 22, marking a 28% increase over the past week. 

This surge is driven by speculation that the U.S. Securities and Exchange Commission (SEC) may approve the first spot Ether exchange-traded funds (ETFs) this week.

In a surprising turn of events, on May 20, the SEC requested Nasdaq, CBOE, and NYSE to refine their applications for listing spot Ether ETFs. The exchanges were instructed to submit their revised applications by the end of Tuesday.

Bloomberg analyst Eric Balchunas noted that multiple ETF issuers, including Fidelity, VanEck, and ARK/21Shares, promptly submitted their amended filings.

These filings, called Form 19b-4, are pivotal as they let the SEC know about a proposed rule change and are among the documents that need the agency’s greenlight before spot Ethereum ETFs can become effective.

Following this news, the price of Ether surged, jumping as much as 18% on Monday to above $3,830 before settling around $3,700 as of this writing. 

It’s important to note that the first round of spot Ether ETF deadlines is approaching, with VanEck’s application due on May 23 and ARK Invest/21Shares’ on May 24. 

The approval of these ETFs would be a huge win for the crypto industry, coming as a surprise to many who were expecting a rejection.

Despite this progress, uncertainty remains. The SEC, led by crypto skeptic Gary Gensler, has historically been cautious about approving spot crypto ETFs due to concerns about market manipulation. 

However, the recent court victory by Grayscale Investments, which forced the SEC to approve spot Bitcoin ETFs, might influence the decision on Ether ETFs.

Nevertheless, in addition to the 19b-4 filing, ETF issuers also need to obtain S-1 approvals from the SEC. The S-1 form is a registration statement that provides detailed information about the ETF, including its investment objectives, strategies, and risks. 

The SEC reviews the S-1 filing to ensure that the ETF complies with all regulatory requirements. The approval process for S-1 filings can vary and may take weeks to months. Once the S-1 approvals are obtained, the ETF can go live and be traded on the market.

This means that it could take weeks to months before we see S-1 approvals and, consequently, a live Ethereum ETF.

What is happening, and what are the odds?

The speculation suggests that the SEC’s change of heart could be politically motivated, possibly influenced by the upcoming elections. 

Former President Donald Trump, who has recently expressed pro-crypto sentiments, criticized President Joe Biden’s understanding of crypto and hinted that crypto enthusiasts should support him. 

This turn of events has led some to believe that crypto has become a campaign issue, particularly as Democrats seek to attract young voters, a demographic heavily involved in crypto.

“The Democrats desperately need young people to go out and vote for them. And the main positioning, if you look at what Biden is doing from a campaign perspective, is to position himself as a forward-looking octogenarian,” a source told The Block. 

Additionally, the Crypto Council for Innovation’s Chief Legal and Policy Officer, Ji Kim, suggested the importance of crypto to constituents and its potential impact on elections, suggesting that crypto voters could be a key swing voting bloc. 

Meanwhile, the SEC’s previous approval of Ether futures ETFs in October 2023, including those from ProShares, VanEck, and Bitwise, could influence its decision on spot Ether ETFs. While the approval of futures ETFs may indicate a willingness to consider spot ETFs, each application is evaluated on its merits.

Market analysts and experts have been closely monitoring the situation. Bloomberg ETF analyst Eric Balchunas raised his odds of spot Ethereum ETF approval from 25% to 75% after hearing rumors of a potential SEC reversal. 

Geoff Kendrick, Head of FX Research and Digital Assets Research at Standard Chartered Bank, expressed similar confidence, estimating an 80% to 90% chance of approval this week.

In response to these developments, the crypto betting platform Polymarket saw a sudden shift in odds. Initially priced at a 10% chance of ETF approval by May 31, the odds soared to nearly 75% within hours and currently stand around 69%. 

Bettors on the platform could see handsome returns if the approval comes through, with nearly 60% returns for a “yes” bet and over 165% for betting against approval.

Could Ethereum ETFs put up a fight for BTC ETFs?

The potential launch of spot ETH ETFs could significantly impact both BTC ETFs and the broader altcoin market.

In just four months since their launch, spot BTC ETFs have amassed an impressive $58 billion in assets under management (AUM), with industry giants like Grayscale and BlackRock leading the pack. This success raises questions about how ETH ETFs might compete with BTC ETFs.

Balchunas compared the situation of Ether ETFs launching after Bitcoin ETFs to a concert where Sister Hazel performs after Nirvana. 

This analogy translates to timing and impact, with Nirvana representing Bitcoin ETFs, which came first and set a high standard. Sister Hazel, symbolizing Ether ETFs, came later and might struggle to match the initial impact.

Despite this analogy, Balchunas predicts that ETH ETFs could capture between 10-15% of the assets currently held by BTC ETFs. While BTC ETFs may continue to dominate, funds may flow from BTC to ETH, creating room for ETH ETFs to establish a presence in the market.

The announcement of Ethereum ETFs has already had a substantial impact, with a $100 billion movement in crypto market cap following the news, suggesting that ETH ETFs could be more than just “small potatoes,” as Balchunas initially described.

The launch of ETH ETFs could also have ripple effects across the altcoin market. As investors diversify their portfolios to include ETH ETFs, other altcoins could benefit from capital rotation from BTC to the altcoin market. 

However, the extent of this impact would depend on how well ETH ETFs perform and whether they can attract a large share of the market currently dominated by BTC ETFs.

Standard Chartered’s analysis suggests that once spot ETFs are approved, they could attract a large amount of capital. They estimate that in the first year after approval, between 2.39 and 9.15 million ETH could be invested, translating to approximately $15 billion to $45 billion in USD. 

If these projections hold true, it indicates a strong interest in ether ETFs, similar to what has been observed with bitcoin. However, ambiguity prevails at the moment, and nothing is certain.

What to expect next?

As speculation mounts regarding the potential approval of a spot ETH ETF in the U.S. on May 23, VanEck’s ETF has been listed by the Depository Trust and Clearing Corporation (DTCC) under the ticker symbol “ETHV.”

The DTCC, a key player in the American financial market infrastructure, provides clearing, settlement, and transaction reporting services. A listing on the DTCC is a crucial step preceding final approval from the SEC.

While VanEck’s ETF is currently designated as inactive on the DTCC website, indicating it cannot be processed until regulatory approvals are secured, it is not the first Ether ETF listed by the DTCC. Franklin Templeton’s spot ETH ETF was listed on the platform a month ago.

Standard Chartered has suggested that if spot Ether ETFs receive approval this week, Ether could keep pace with Bitcoin, with the current 5.4% price ratio potentially holding for the remainder of 2024.

Geoff Kendrick, Head of FX Research and Digital Assets Research at Standard Chartered Bank, noted, “given that we now see Bitcoin reaching the $150,000 level by end-2024, this would imply a level of $8,000 for Ether.”

However, while spot Ether ETF approval could have positive effects, the crypto market remains volatile and subject to regulatory changes. You should exercise caution and conduct thorough research before making any investment decisions.