Spot Ether ETFs not the boon industry thinks

While SEC approval of spot Ethereum ETFs could provide some clarity on Ether’s non-security status, experts believe it could present unintended consequences for the ecosystem.

After months of negotiations and delayed decisions, the U.S. Securities and Exchange Commission (SEC) has accepted spot Ether (ETH) ETFs. However, this approval is currently limited to 19b-4 filings, potentially taking months before actual trading authorization is granted as issuers’ S-1 filings are still being reviewed.

Bloomberg’s James Seyffart noted that actual trading authorization could take up to several months.

I will add here. Usually this process takes months. In some examples, up to 5 months, but @EricBalchunas and I think that will be accelerated at least somewhat. #Bitcoin ETFs were at least 90 days old. We’ll know more soon.

— James Seyffart (@JSeyff) May 23, 2024

While the industry welcomes the so-called progressive move, especially following the 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

The main difference between ETFs backed by BTC and ETH lies in the individual consensus mechanisms that both blockchains use. Bitcoin uses a proof-of-work model in which miners solve complex mathematical equations for block rewards.

Combined with the general absence of smart contract functionality and defined ecosystem, the simple design encourages participants to send and hold BTC.

Ethereum is different. Even before the network moved to a proof-of-stake design, ETH was supporting a multi-billion dollar tokenization environment and was built for on-chain distribution.

Flipside Crypto data scientist Carlos Mercado said the inability to use ETH embedded in funds undermines the asset’s benefits. “Keeping ETH idle is like hoarding barrels of gasoline; it is not the best use of the asset,” Mercado explained.

Staking may have addressed this concern, but all staking language has been removed from several updated spot Ethereum ETF offerings. The SEC has also cracked down on staking service providers like Coinbase, creating further speculation about U.S. adoption of crypto staking.

According to Vega Protocol quant developer Tom McClean, removing staking features alleviated centralization issues but did not fully solve the problem. Rather than issuers potentially allocating ETH to a single validator or select group, ETFs seem likely to simply buy, hold, and sell Ether tokens.

According to McClean, this “will introduce the risk that large amounts of ETH will remain both unused and unproductive in the system overall, as it cannot be used for gas etc.”

Regulatory clarity

On the other hand, McClean believes the outcome could push investors and issuers to seek regulatory clarity on staking. Keyrock’s head of business development (APAC) Justin d’Anethan echoed similar sentiments, noting that the approved applications apparently confirm Ether as a non-security asset.

The crypto executive noted that applications are not filed in the same way as for security-linked ETFs. “A gambling man might see this as a clear sign that regulators will not accept Ether as a security. “This will lift the burden off the shoulders of many investors and Ethereum shareholders.”

Although the allegations and approved filings suggest the SEC has done a 180-degree turn on ETH’s financial instrument status, it is still unclear how the Wall Street regulator views the asset.