While the approval of spot Ethereum ETFs by the SEC may provide some clarity on Ether’s non-security status, experts believe it could bring out unwated ramifications for the ecosystem.
After months of deliberation and delayed decisions, the U.S. Securities and Exchange Commission (SEC) has accepted spot Ether (ETH) ETFs. However, this approval is currently limited to the 19b-4 filings, with actual trading authorzation potentially taking months as issuers’ S-1 applications are still under review.
Bloomberg’s James Seyffart noted that actual trading authorization could extend over several months.
Going to add here. Typically this process takes months. Like up to 5 months in some examples but @EricBalchunas and I think this will be at least somewhat accelerated. #Bitcoin ETFs were at least 90 days. Will know more soon.
— James Seyffart (@JSeyff) May 23, 2024
As the industry hailed the so-called progressive move, especially after similar approval of spot Bitcoin (BTC) ETFs, three experts told crypto.news that spot Ether funds could mean more than some imagine.
Centralization and Ether dormancy
A fundamental difference between ETFs underpinned by BTC and ETH lies in the individual consensus mechanisms employed by both blockchains. Bitcoin employs a proof-of-work model, where miners solve complex mathematical equations for block rewards.
Coupled with a general absence of smart contract functionality and a defi ecosystem, the simple design incentivizes participants to send and hold BTC.
Ethereum is different. Even before the network transitioned to a proof-of-stake design, ETH powered a multi-billion dollar defi landscape and was built for on-chain deployment.
Flipside Crypto data scientist Carlos Mercado said the inability to use ETH domiciled in the funds seems counterproductive to the asset’s merits. “Holding ETH idly is like hoarding barrels of gasoline—it’s not the best use of the asset,” Mercado explained.
Staking may have addressed this concern, but all staking language was withdrawn from several updated spot Ethereum ETF bids. The SEC also cracked down on staking service providers like Coinbase, adding further speculation around U.S. crypto staking adoption.
According to Vega Protocol quantitative developer Tom McClean, axing staking features eased questions of centralization, but it failed to address the problem fully. Instead of issuers potentially allocating ETH to a single validator or a select group, the ETFs look likely to only buy, hold, and sell Ether tokens.
This will “introduce the risk of large amounts of ETH remaining both unstaked and unproductive in the system in general, as it will also not be used on gas etc”, per McClean.
Regulatory clarity
On the flip side, McClean believes the outcome could push investors and issuers alike to seek regulatory clarity on staking. Keyrock’s head of business development (APAC), Justin d’Anethan echoed similar thoughts and opined that approved filings seemingly endorsed Ether as a non-security.
The crypto exec noted that applications weren’t filed in the same manner as securities-linked ETFs. “A gambling man might see this as a clear sign that regulators will not deem Ether a securities. This would lift a weight off of the shoulders of many investors and Ethereum stakeholders.”
Although the arguments and approved filings suggest a 180 turn from the SEC on ETH’s financial instrument status, it’s still unclear how the Wall Street regulator views the asset.