SEC Approval of Sport Ether ETFs

The SEC has approved a rule change on Thursday, paving the way for ETFs that buy and hold ether, one of the world's largest cryptocurrencies.

This decision comes less than six months after the SEC approved bitcoin ETFs, which have already been a significant success, with net inflows exceeding $12 billion according to FactSet.

Late May was anticipated as a potential decision date for the ether funds, coinciding with the SEC's deadline to decide on the VanEck Ethereum ETF.

Many companies that sponsor bitcoin ETFs, including BlackRock, Bitwise, and Galaxy Digital, have started the process of launching ether funds.

The price of ether increased by just 2%, following a 20% surge earlier in the week in anticipation of Thursday's decision. Some investors remain cautious as the SEC's approval of the rule change does not guarantee the immediate launch of these funds.

The SEC's order approves applications from various exchanges to list eight different ether funds but does not specifically approve the funds themselves or set a trading date.

Initially, ether ETFs are expected to be smaller than their bitcoin counterparts. The Grayscale Ethereum Trust currently holds about $11 billion in assets, much smaller than the firm's bitcoin fund before its conversion.

The approval of ether ETFs suggests a softening stance from the SEC towards crypto following several legal battles. The agency lost a lawsuit against Grayscale in 2023, which led to the approval of bitcoin products.

The SEC's regulatory approach to crypto has faced political scrutiny, with the Senate recently passing a resolution to withdraw an SEC staff bulletin about accounting rules for digital assets.

Ether, the second-largest crypto asset, is considered a blue-chip coin alongside bitcoin. However, its value proposition differs, with ether seen as an investment in early-stage technology. The ether token powers the Ethereum network, enabling applications like decentralized finance (DeFi) projects, non-fungible tokens (NFTs), and tokenization of real-world assets such as commodities, securities, art, and real estate.

The approved applications do not extend to other crypto projects on the Ethereum network, according to Richard Kerr, a partner at the law firm K&L Gates.

"If an ether product is approved, it doesn't mean a similar product for other digital assets on the Ethereum platform will be approved," Kerr said.

Ethereum also offers staking opportunities, allowing investors to earn interest by locking up tokens on the network. However, U.S. ether ETFs may not participate in staking. The SEC has argued in lawsuits against Coinbase and Kraken that staking-as-a-service offerings are unregistered securities. Ark, Fidelity, and Grayscale have updated their filings to exclude staking from their proposals.

The exclusion of staking is another reason ether ETFs may attract less demand than bitcoin ETFs, according to Steven Lubka, managing director at Swan Bitcoin and head of Swan Private.

"These numbers won't match bitcoin ETF inflows due to structural differences in the product that make it less attractive overall," Lubka said.