Galaxy Digital’s Thorn says SEC could label staked ETH as security in ETF plans

Alex Thorn of Galaxy Digital suggests that the SEC may classify staked Ethereum as a security in order to find a cycle to approve the spot Ethereum ETF.

The U.S. Securities and Exchange Commission (SEC) may take a surprising turn regarding the approval of spot Ethereum exchange-traded funds (ETFs), according to Alex Thorn, head of research at Galaxy Digital.

If the SEC’s speculative 180 on Ethereum ETFs is correct, I think they’re trying to thread a needle between “ETH” that isn’t a security and “stake ETH” (or more weakly, “stake as utility ETH”). ) as a security BEING.

that would be kinda fitting…

— Alex Thorn (@intangiblecoins) May 21, 2024

In an X post on May 21, Thorn suggested that the SEC could make a nuanced distinction between Ethereum and staked Ethereum, potentially classifying the latter as a security.

“If the SEC’s 180 speculation about Ethereum ETFs is true, I think we’re trying to draw a needle between ‘ETH’ not being a security and ‘staking ETH’ (or more weakly, staking as ‘utility ETH’) I predict they will work ‘) as a security.”

Alex Thorn

This divergence could have significant implications for spot Ethereum ETFs, which the SEC has so far been hesitant to approve.

Thorn said the change in strategy would be consistent with the SEC’s ongoing legal battles and investigations and would allow the commission to approve Ethereum ETFs while adhering to its previous arguments and positions. However, Thorn says the chosen approach may also include certain restrictions on spot Ethereum ETFs.

“In this case, and perhaps for other reasons, you would expect the SEC to prohibit ETFs from staking their holdings of ETH.”

Alex Thorn

By distinguishing between ETH and staked ETH, the SEC can navigate the complex regulatory landscape and potentially allow for the introduction of Ethereum ETFs while maintaining a strict regulatory framework around staked assets and other altcoins. But it’s unclear exactly how the SEC will treat tokenized versions of, say, Ethereum or Bitcoin for use in layer 2 solutions (including lending).

Meanwhile, Ethereum is up over 17% following news that the SEC may approve spot ETH ETFs, despite the market’s previous consensus that the watchdog would not give the green light.

Update: @JSeyff and I’m raising our odds of spot Ether ETF approval to 75% (up from 25%), I’m hearing rumors this afternoon that the SEC might do a 180 on this (increasingly political issue), so now everyone’s scrambling (everyone like us as he assumed) they would be rejected). See… https://t.co/gcxgYHz3om

— Eric Balchunas (@EricBalchunas) May 20, 2024

Bloomberg senior analyst Eric Balchunas, who had previously said there was “no chance” of instant approval of the Ethereum ETF, made a U-turn on May 20. Increased the approval chance on post X from 25% to 75%. This implies that the SEC’s increased pace of ETF approval may be a result of the agency facing political pressure, as its previous stances showed little interaction with ETF applicants.