US Paves Way for Ether ETFs in Test of Crypto Demand Beyond Bitcoin

(Bloomberg) — The crypto industry is nearing another milestone after the Securities and Exchange Commission cleared the way for the eventual launch of the first U.S. exchange-traded funds to invest directly in the Ether token.

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In a move that seemed unlikely as recently as last week, the SEC on Thursday signed off on a proposal to list products tied to the second-largest digital asset by institutions led by Cboe Global Markets Inc., Nasdaq and the New York Stock Exchange.

Fund managers still need separate approval from the institution before launching products for which the timeline is uncertain. Assuming they get the green light, one key question is whether Ether portfolios will generate anything resembling the demand revived by the historic launch of U.S. spot Bitcoin ETFs in January.

The latter has accumulated $57 billion in assets, including VanEck, ARK Investment Management, BlackRock Inc. and Fidelity Investments to gain first-mover advantage in the race to launch Ether instruments.

Lara Crigger of data provider VettaFi said in a cautionary note that she doubts Ether ETFs can attract flows on the same scale as Bitcoin products. “Although Ether has more uses, it is a much smaller market than Bitcoin and has lower awareness and name recognition among general investors,” he said.

Ether Retreat

Ether was down nearly 3% to $3,640 as of 9:30 a.m. Friday in London, paring its advance in ETF fanfare this week to 18%. It remains the digital currency’s best weekly performance since early 2023, according to data compiled by Bloomberg. Broader crypto markets, including market leader Bitcoin, also pulled back.

FxPro senior market analyst Alex Kuptsikevich said Ether’s selloff over the past few hours was a typical buy-the-rumor, sell-the-fact response from speculators. Bitcoin also swooned following the launch of US ETFs for the token, which proved to be temporary.

Last week, companies expected the SEC to reject the Cboe plan and potentially others by Thursday. Additional SEC approval is still needed for issuers. Backers hope eventual listings will raise money from retail and institutional investors reassured by the ETF suite.

Rich Rosenblum, president of liquidity provider GSR Markets Ltd, said the latest developments are a significant turning point for crypto. Addressing the sudden turn toward approval, Rosenblum said, “In the 12 years I’ve been trading in this space, this is the most incredible thing ever.” I can remember the thematic whip saw.

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The SEC’s order followed the Ether spot market and its follower, CME Group Inc. in Chicago. He repeated his order for exchanges to list Bitcoin ETFs in January, including a lengthy discussion of correlations between futures hosted by . How closely two markets move is a crucial point for regulators who want CME surveillance systems to detect trading anomalies before they spiral.

Correlation Study

Coinbase Global Inc. presented a study showing that the correlation between spot and futures markets for Ether was approximately 85% in one-minute intervals between March 2021 and January 2024, which it said was higher than noted in its Bitcoin review. The SEC said it replicated this and other studies and found that they “provided empirical evidence that prices generally move in close (though not perfect) alignment” between the spot and CME Ether futures markets.

Beyond ETFs, recent developments may have broader policy implications. SEC Chairman Gary Gensler has been vague on whether Ether is a security, and crypto enthusiasts are concerned that the token and potentially projects based on the Ethereum blockchain could fall under the agency’s onerous and costly rules.

The Commodity Futures Trading Commission, the US regulator with jurisdiction over derivatives, has signaled that it does not consider Ether a security. The CFTC has allowed trading of CME Ether futures for years.

Exchange proposals to list the products are based on Ether being a commodity, not a security, said Lee Reiners, policy director at Duke University’s Duke Center for Financial Economics. He said the SEC’s decision to greenlight the plan supports the SEC’s view that it still does not consider Ether a security.

Checkered History

The digital asset industry has been trying to recover over the past year from the 2022 market debacle and a series of scandals, such as the massive fraud and subsequent jailing of Sam Bankman-Fried on the collapsed FTX exchange. Demand for US Bitcoin ETFs helped the cryptocurrency soar to a record high in March.

Part of this rise stems from optimism that U.S. pressure may be easing. The Republican-led House advanced comprehensive crypto legislation this week despite opposition from the White House and Gensler. The Senate is not expected to approve the measure, but the resolution has garnered some support from Democrats in the House of Representatives.

To win SEC approval, asset managers are making concessions, particularly around staking, the process of earning rewards for blockchain maintenance. Fidelity said it would exclude the Ether it purchased under the ETF from staking.

Staking is an important issue for Ether because it raises questions about whether the token should be considered a security. Last year, the SEC accused Coinbase of breaking its rules by offering staking services.

The Gensler-led institution was skeptical of the crypto industry and reluctantly settled for spot Bitcoin ETFs following a court ruling in 2023.

–With assistance from Isabelle Lee, Ben Bain, Michael P. Regan, Muyao Shen, Olga Kharif, Chris Nagi, and Emily Nicolle.

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