Ethereum ETFs are here: Insights into the SEC's approval

All about the approval of spot Ethereum ETFs

The crypto community celebrated the Bitcoin Pizza Day on 22 May 2024, and received more good news from the financial world the following day – the U.S. Securities and Exchange Commission finally gave the green light to the creation of Exchange-Traded Funds (ETFs) that will hold Ethereum directly. A total of 8 ETFs received approval.

The approval of spot Ethereum ETFs presents another important milestone in the development of crypto investment products. SEC’s approval came just a few months after the historic approval of 11 spot Bitcoin ETFs which indicated an increased regulatory acceptance of cryptocurrency investment products. 

If you're interested in whether Bitcoin ETFs could increase crypto adoption, why not read this article: 'Are Bitcoin ETFs the key to the mass adoption of crypto?'.

What was the word on the street after the approval of Bitcoin ETFs?

On the Bitcoin Pizza Day, there was chatter about the SEC reaching out to major exchanges for revisions of their 19b-4 filings. The SEC form 19b-4 is used by covered self-regulatory organisations to record a rule change with the SEC. 

A major part of the crypto community and industry experts expected a delay in the regulatory approval of Ethereum ETFs. Therefore, the crypto space was caught off guard when the U.S. federal agency asked exchanges to update their filings ahead of a key deadline. Before this accelerated approval happened, the word on the street was that the U.S. could reject the Ether ETF filings.

This still didn’t mean that ETFs will be approved since issuers typically need their S-1 applications approved as well, and the agency could take a longer period of time to approve these documents. However, the SEC acted fast and approved spot Ether ETFs.

Key factors that influenced SEC's decision

The SEC conducted an analysis to verify the correlation results provided by commenters such as Bitwise’s amendments and the Coinbase letter and confirmed a high correlation between Ethereum futures and spot Ethereum markets. 

The federal agency took into consideration investor protection, market integrity, and volatility concerns by addressing all of these elements in its approval. For spot Ethereum ETFs to be approved, the SEC has prioritised investor protection. The government issued several directives to ensure that the new ETFs function under increased security conditions.

For example, regulated ETF issuers are required to create partnership agreements known as surveillance sharing agreements which are important for the status of Ethereum prices due to enabling Ethereum price movements to remain in a certain range.

SEC’s green light has been provided rapidly, but there have been ongoing debates concerning the agency’s standing on the Ethereum staking feature. A few major crypto companies initially included staking provisions in their filings, yet ahead of the SEC’s deadline, they decided to amend their filings and eliminate references to staking.  

According to some analysts, spot Ethereum ETFs were approved when issuers removed staking references from their filings. Staking has been an important issue between fund issuers and the SEC because it is still unclear whether an issuer staking Ether on behalf of ETF shareholders amounts to an investment contract under the Howey test and therefore presents a security. 

What does the Ethereum ETF approval mean for investors?

The creation of Ethereum ETFs could have a positive effect on investors such as an increased option for accessing crypto through familiar pathways. In other words, Ethereum investors are provided with more options for investing in crypto assets.

Additionally, ETFs are designed to provide investors with the possibility of purchasing a variety of assets at the lowest possible risk for the best returns on investments.

Why does the Ethereum ETF approval matter?

The launch of Ethereum ETFs means that the institutional acceptance and interest in the cryptocurrency space is growing. ETFs present a vehicle for gaining exposure to the underlying asset, and potentially these funds could bring more users to Ethereum. 

The approval of Ether ETFs is a second major step forward for the whole crypto industry as it confirms that capital markets are getting involved in the crypto industry. Capital markets could be the next step of adoption of crypto products and services. 

Secondly, SEC’s green light highlighted the potential of smart contracts and decentralised applications (Dapps) which are key components of the Ethereum network. The ETF wrapper can remove regulatory obstacles and provide direct Ethereum exposure while putting Ethereum’s underlying technology into the spotlight. 

The approval of spot Ethereum ETFs presents a significant milestone and a moment for the crypto industry to celebrate despite all the challenges ahead.

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