As the deadline for the United States Securities and Exchange Commission (SEC) to decide on the approval of a spot Ether exchange-traded fund (ETF) approaches, the debate over whether Ether is a security has become a focal point in the crypto ecosystem. The SEC’s final deadline to decide on VanEck’s spot Ether (ETH) ETF application is May 23. The outcome of this decision will have significant implications for Ether, the second-largest cryptocurrency after Bitcoin (BTC), as it hinges on whether the SEC determines Ether to be a commodity or a security. While the SEC has already approved spot Bitcoin ETFs, the approval of an Ether ETF is uncertain due to the ongoing investigation into Ether’s status as a security. This has led many analysts to adopt a more pessimistic outlook regarding the chances of the ETF’s approval. Bloomberg ETF analyst Eric Balchunas, who previously gave the approval of a spot Ether ETF a 70% chance, now estimates the odds to be a “very pessimistic 25%”. The biggest obstacle to spot Ether ETFs is the investigation conducted by Gurbir Grewal, the head of the SEC’s Division of Enforcement, into Ether’s security status. The SEC established a five-member commission to investigate “Ethereum 2.0” on April 13, 2023. Consensys, a blockchain and Web3 software company, filed a lawsuit against the SEC in April, challenging its authority to regulate Ether as a security. The conflict between the SEC, which regulates securities, and the Commodity Futures Trading Commission (CFTC), which regulates commodities, raises questions about which decision will prevail in the case of a conflict of interest. Legal expert Jamie Wright believes that the SEC may prevail due to its comprehensive regulation of securities and emphasis on investor protection. SEC Chair Gary Gensler’s vote on the approval of spot Bitcoin ETFs has led many to believe that his vote played a significant role in securing their approval. However, internal documents suggest that Gensler considers Ether to be a security, which could influence the decision on a spot Ether ETF. Finance lawyer Scott Johnsson notes that the SEC is considering the security question for Ether in the upcoming spot ETF order, as indicated by the inclusion of “notice of the grounds for disapproval” in the decision. This clause was absent in the Bitcoin ETF decision. Johnsson suggests that the purpose of this query may be to deny the spot filings on the grounds that they are improperly classified as commodity-based trust shares and do not qualify if they hold a security. According to Adam Berker, senior legal counsel at Mercuryo, the SEC and Gensler have consistently treated all digital tokens, except Bitcoin, as securities. The presence of early stage pre-mining, an initial coin offering, and a centralized organization like the Ethereum Foundation strengthens the argument that Ether is closer to a security than a commodity. The ability for ETH holders to earn staking rewards further supports the SEC’s view that Ether could be a security. However, the move to Ethereum’s proof-of-stake (PoS) protocol introduces elements that align with the Howey test criteria for an investment contract but does not necessarily classify Ether as a security. To address potential difficulties related to staking, five ETF applicants recently submitted amended filings that explicitly state that the Fund’s ETH cannot be staked. The upcoming U.S. presidential election is expected to have a significant impact on the fate of spot Ether ETFs. Some experts believe that a change in government could lead to new cryptocurrency regulations, especially considering former president Donald Trump’s support for crypto assets. However, others caution that Trump’s advocacy may not carry much weight after the elections. While some in the crypto community see SEC Chair Gary Gensler’s appointment as a positive development, his actions have been perceived as taking a hard line against the industry. A new administration could potentially change policy priorities and regulatory approaches, influencing how the SEC and other regulators view Ether. The regulatory environment for cryptocurrencies may become more dynamic and subject to change depending on shifts in key regulatory positions and the overall political climate.
Deadline for SEC ETF decision approaches amidst ongoing debate on Ether security