Factors Hindering ETH Spot ETF Approval

Ronnie_Chan
ZMQuant
Published in
3 min readApr 30, 2024

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Following the U.S. SEC’s approval of 11 BTC Spot ETF applications in January 2024, anticipation in the market grew for the approval of the ETH Spot ETF as the next spot crypto ETF sanctioned by the SEC. However, with the SEC postponing its decision on the proposed ETH ETF, market specialists have seen a decrease in the likelihood of approval, dropping from around 80% to less than 30% nowadays. What factors caused this decline in market confidence, and what sets apart the ETH ETF from the BTC ETF?

Two primary uncertainties loom over the potential approval of the ETH ETF. Firstly, it remains unclear whether the SEC will categorize ETH as a security or commodity due to the proof of stake algorithm. Additionally, there is uncertainty regarding how the SEC perceives the influence of the Ethereum Foundation on ETH.

Security or Commodity?

Following the introduction of the proof of stake algorithm in Ethereum during the ETH2.0 upgrade, Gary Gensler, chair of the U.S. SEC, suggested that PoS chains should be classified as securities due to the algorithm, where investors lock up their tokens as a security model for rewards, resembling investment contracts. While ETH has not been explicitly labeled as a security, the SEC’s delay in decision-making and recent lawsuits against exchanges like Coinbase, Binance, and Kraken, focusing on their sale of securities (including $SOL and $ADA) to U.S. investors without proper registrations, hint at potential complexities in approving the ETH ETF within the SEC.

Ethereum Foundation’s Influence on ETH Market

Moreover, the SEC has subpoenaed several U.S. companies for documents related to their interactions with the Ethereum Foundation. Given the Foundation’s efforts to boost ETH’s value and the active involvement of its team members in the industry, this further complicates the approval process compared to that of BTC.

The Chance Still Exists

Nevertheless, approval still appears likely due to ETH’s significant influence and importance in the crypto sphere, unmatched by other altcoins. If ETH is labeled as a security due to PoS, it could have severe repercussions on the financial industry, which the SEC would likely want to avoid.

Coinbase’s CLO, Paul Grewal (@paulgrewal.eth), also presented evidence suggesting that ETH is not a security but a commodity. This includes statements such as “Senior SEC officials have said ETH is not a security” and “Before he was SEC Chair, Gary Gensler himself testified before Congress that ETH is not a security”.

( https://twitter.com/iampaulgrewal/status/1770594620969501035 )

ETH Future ETF Approved by SEC in 2023

Moreover, ETH has been traded on prominent exchanges such as CME in America for years, and its futures trading has been approved by the CFTC. During a congressional hearing, CFTC Chairman Rostin Behnam directly stated to lawmakers that ETHr is considered a commodity. Additionally, the SEC approved the ETH Future ETF in 2023. Despite the SEC’s ongoing indecision regarding ETH classification, the approval of an ETH Spot ETF remains likely.

Market Maker Perspectives in the Approved ETH

Looking ahead to the potential future with SEC approval of an ETH ETF from a market maker’s perspective, we anticipate a significant surge in trading activity and liquidity within the ETH market, accompanied by substantial arbitrage opportunities. This will attract more competitive TradFi market makers entering web3 field, fostering innovation and collaboration, resulting in a healthier market environment.

Despite the SEC’s ambiguous stance on the ETH ETF, global recognition of crypto’s importance continues to rise steadily. In line with our commitment to innovation and growth, we are actively exploring collaboration opportunities.

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