Ethereum Latest to Land on the ETF Bandwagon

Following the recent deluge of Bitcoin ETF submissions to the US Securities and Exchange Commission (SEC), a wave of Ethereum ETF submissions has washed ashore since late July aiming to capitalise on what issuers are no doubt hoping is a receptive mood on the part of the SEC.

Applications have emerged in the last two weeks from Volatility Shares, Grayscale, Proshares, Bitwise, Roundhill, VanEck and Direxion, among others. Some offer pure exposure to Ethereum (ETH), while others provide dual exposure to both BTC and ETH.

An Ethereum spot ETF traded on traditional securities exchanges would provide an immediate on-ramp for investor funds to get exposure without running the risk of buying from unregistered crypto exchanges. This would likely give the Ethereum ecosystem an advantage over its smart contract competitors.

Hurdles to Listing

But an ETH ETF faces several hurdles that BTC has already overcome. The first is that the SEC already approved ETFs providing exposure to BTC futures contracts back in late 2021 which is still not the case for ETH, let alone for spot ETH exposure. The second is that SEC Chair Gary Gensler has already declared BTC a commodity and not a security while remaining silent on the question of whether ETH is a security, leaving issuers and investors in doubt.

Issuers may well be speculating on obtaining a first mover advantage in being approved in the first wave of approvals. The lesser known/smaller issuers may also be trying to get ahead of the likes of the larger players such as Blackrock which has its BTC ETF application outstanding but has yet to reveal an ETH equivalent. Some might also be doing so simply as a hedge against their competitors achieving a successful outcome.

Either way, a fully registered and approved spot ETH ETF is also likely to attract significant investor interest from all segments — retail, wholesale and institutional — to gain exposure to the crypto #2 and the current leader for smart contract applications, non-fungible tokens (NFTs), de-centralised finance applications (DeFI), de-centralised autonomous organisations (DAOs), and the metaverse.

Broad Range of Uses

While the total ETH market cap currently sits at around $A340 billion (being some 40 per cent of BTC’s market cap), the Ethereum network and ecosystem focus on smart contract applications makes it a purer, and riskier, exposure to blockchain innovation than Bitcoin. Bitcoin has arguably cornered the market as a “digital gold” or “store of value” for the digital age (albeit highly volatile), but Ethereum has a broader range of use cases within its sights.

Some responsibility for the uncertainty about Ethereum’s status as a security rests with Gensler himself. As a professor at the Massachusetts Institute of Technology in 2018, Gensler offered his opinion in a widely circulated video that most crypto tokens weren’t securities. But in his present role as the SEC Chair, he has steadfastly declined to provide clarity.

In the US, an asset meets the definition of a security if it is an “investment of money in a common enterprise from which there is an expectation of profit based on the efforts of others”. This precedent arose from a famous court case in 1938, SEC v. W.J. Howey Co., in which the Supreme Court ruled on an interpretation of the Securities Act (and the Securities Exchange Act). This has become known as the “Howey Test”.

Intense Scrutiny

This uncertainty has led to intense scrutiny by the SEC and other regulators into crypto exchanges dealing in ETH and other crypto tokens including the biggest names beneath the “big two” including Cardano (ADA), Solana (SOL), Polygon (MATIC), Cosmos (ATOM), NEAR Protocol (NEAR), Binance Coin (BNB), Filecoin (FIL), and Algorand (ALGO). (The SEC has named ~70 tokens as securities as of writing but has left the door open on Ethereum).

Investors waiting to deploy funds shouldn’t hold their breath. On 12 August, the SEC deferred its decision on the Ark 21Shares application for a Bitcoin spot ETF, which arguably is less contentious than an Ethereum spot ETF (given the SEC’s acknowledged view that Bitcoin is a commodity not a security).

Many crypto watchers believe that the SEC is waiting to approve Blackrock’s Bitcoin application first, rather than any of the several other applications in the queue. Whether this is just a crypto conspiracy theory or evidence of Wall Street’s ties to the SEC, only time will tell. The SEC move is a likely portent that the Ethereum ETF applications are likely to take some time to be approved… if they are approved at all.

Nevertheless, the fact that there is now a conga line of both Bitcoin and Ethereum spot ETF applications snaking towards for the SEC is a remarkable turn given the depths of the crypto wipeout last year.