The approval of the first spot Bitcoin (BTC) exchange-traded fund (ETF) in the U.S. marked a historic day for the cryptocurrency ecosystem as it brought greater legitimacy to the asset class, opened the door for the trillions in funds held by institutions to flow into cryptocurrencies, and paved the way for other digital assets to be listed as ETFs.
While it is highly unlikely that the vast majority of tokens would ever gain ETF approval, certain projects have a better chance than others, including Ethereum (ETH), the second-ranked crypto by market capitalization and the top smart contract platform.
Previous statements by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have indicated that they view Ether as a commodity – giving it a higher chance of approval – but issues related to Ether staking suggest to some that it behaves more like a security, which makes the approval of a spot ETH ETF more of a challenge.
“Staking, as well as smart contract functionality, is one of the main differentiators between tokens like Ethereum and store-of-value tokens like Bitcoin,” said Markus Levin, co-founder of XYO. “The main question the SEC will have to answer is whether these functions prohibit tokens from becoming an ETF.”
“Post-approval, the option to stake will introduce an interesting market dynamic pitting profits against convenience,” he added. “While certain investors may opt for holding and staking real Ether to gain yields and participate in network activities, an ETF offers a more convenient and liquid alternative to holders who do not care too much about the decentralization part.”
Levin said that the Bitcoin ETF hype helped BTC price surge higher while ETH lagged behind, but expects Ether to play catch-up as the hype around an ETH ETF starts to build.
“Ethereum has been lagging behind Bitcoin and altcoins such as Solana for months. The approval has the potential to propel Ethereum forward, rekindling mainstream interest and serving as a pivotal moment for the cryptocurrency,” he said. “It could breathe new life into Ethereum's market position, fostering increased confidence among investors and reinstating its prominence as a key and influential player in the digital asset space.”
While the ETF talk has focused on Bitcoin, Levin said that the approval of an Ether ETF would mark a sea change for the industry and could usher in a new era for digital assets.
“The green light for Ethereum ETFs could set off a chain reaction, generating heightened interest and demand for other notable altcoins,” he said. “This phenomenon has the potential to reshape the dynamics of the entire cryptocurrency market.”
Levin said the approval of an ETH ETF would indicate a greater level of “regulatory acceptance and deeper integration into conventional finance.” He suggested this would “play a role in the maturation and broader acceptance of the cryptocurrency market,” as it would “enhance confidence, entice greater participation from institutional investors, and open avenues for additional financial products related to crypto.”
“Approval could open the floodgates for most highly liquid cryptocurrencies, such as Solana, or even Layer-2s like Polygon, to receive ETFs, alleviating concerns that staking and smart contract functionality bar networks from receiving ETF approval,” Levin said. “It would force the SEC and Congress to finally provide clear guidance on the definition of a digital security.”
“An Ethereum ETF would likely have a greater impact on the crypto industry as a whole compared to a Bitcoin ETF,” said Navin Vethanayagam, “chief brain” at IQ.wiki.
“From an investor's perspective, the Ethereum ecosystem offers a broader array of opportunities compared to Bitcoin,” he said. “For example, liquid staking, a distinct feature of Ethereum enables even greater returns for investors as staked Ether by participating institutions through the ETF will generate additional yield (over and above the shifts in Ether’s price). Liquid staking tokens would be made available through this process which will enable participants to utilize those tokens to leverage a wide array of investment opportunities through financial applications in Ethereum.”
“While crypto enthusiasts often view Bitcoin and Ethereum as close competitors, the reality is that mainstream awareness and interest in Bitcoin outweigh Ethereum by a significant margin,” Vethanayagam said. “Therefore, this approval of Bitcoin ETF is an important milestone to catalyze a new wave of new investors who are currently more familiar with Bitcoin, to venture into the Ethereum ecosystem and benefit from a wider range of investment opportunities available there.”
Likelihood of approval
While many have assumed that the approval of a spot BTC ETF will automatically lead to the approval of a spot ETH ETF, nothing is certain in crypto as regulators have taken a hard-nosed approach to the asset class.
“There are significant differences between Ethereum and Bitcoin that may not be apparent to the average investor,” said Slater Heil, founder and CEO of Composable Corp. “Bitcoin has achieved true decentralization, lacking a prominent thought leader and featuring a dispersed group of, frankly, underfunded developers without a singular mission. It operates as an extremely decentralized system, and Ethereum faces similar arguments in this regard.”
“If we delve into the security versus commodity debate, Bitcoin appears unequivocally as a commodity, essentially a derivative of energy,” he said. “In contrast, Ethereum operates as a computer platform competing with others to provide superior services. Ideally, we would live in a world where achieving a common enterprise and effort for a project ensures it's not classified as a security once sufficient decentralization is attained.”
“The critical factor here is 'decentralization.' The verdict depends on whether Congress and the SEC can agree on whether sufficient decentralization exempts an asset from being labeled a security,” Heil said. “Additionally, the regulatory framework needs to accommodate the permissionless nature of these networks, a hurdle Bitcoin has already overcome. Ethereum has reached that point, with the SEC not pursuing a security case against it. This positions Ethereum for likely classification as a commodity, smoothing the ETF application process.”
“However, the journey involves navigating numerous risks and challenges for Ethereum ETFs, making the upcoming year particularly interesting,” he warned. “If Ethereum ETFs gain approval, it will set off a domino effect, prompting other crypto assets to pursue similar paths. This rush could lead to increased clarity on which crypto assets fit within this system and which do not, benefitting the entire industry.”
“It's difficult to put a number on it, however, I've seen the likelihood of approval this May pegged at 70%. That strikes me as optimistic, I would put it around 50/50 today,” said Seth Hertlein, head of policy at Ledger.
“The case for approval runs like this: The SEC has previously approved ETH futures ETFs and the Grayscale Court ruled that BTC futures ETFs were legally indistinguishable from BTC spot ETFs, therefore, the SEC had to approve BTC spot ETFs,” he said. “Applying the same logic, the SEC must also approve ETH spot ETFs because they've already approved ETH futures ETFs. But keep in mind, the SEC only approved the BTC spot ETFs in response to a court order, and even then, two of the Democrats on the Commission were still willing to defy the court!”
“In the case of ETH ETFs, while the holding of the Grayscale decision is analogous, there is no court order, as yet, forcing the SEC to approve, and the current Commission has proven that it's perfectly willing to be obstructionist to the bitter end,” he added. “I could easily envision the SEC trying to delay a final decision on ETH spot ETFs until after the November election.”
Hertlein said that in the event that an ETH ETF is approved, the SEC will “approve all similar pending applications simultaneously,” similar to what was done with Bitcoin.
While he sees the approval of a spot ETH ETF as continuing the “trend of increasing legitimacy and institutionalization of crypto,” and said it would aid in increasing the “mainstream adoption that so many have been hoping for,” Hertlein warned that these effects are “somewhat at odds with the original crypto ethos.”
“While early crypto adopters want to see ‘numbers go up,’ they shouldn't be too quick to celebrate so much of the market machinery becoming captured behind Wall Street's gates,” he said. “It doesn't seem like the robust, decentralized future we were promised if crypto ETFs take the lead in terms of trading volume and all of that volume is managed by a few fund managers who trade on crypto platforms.”
“It is very likely that the Spot ETH ETF will be approved,” said Will Adams, head of global business development at MatterFi. “It seems that history is repeating itself. The CBOE and the CME launched bitcoin futures in mid-December 2017. Afterwards, the CME launched ETH futures in February 2021. Then shortly thereafter, micro- or mini-BTC and ETH futures were issued in 2022.”
“The same progression will likely happen with spot ETH ETFs,” Adams said. “Broadening market interest and demand have encouraged these financial products.”
“The likelihood of spot Ethereum ETF approval appears relatively high, with Bloomberg Intelligence analyst Eric Balchunas estimating a 70% chance of approval by May 2024,” said Rob Greig, co-founder and co-CEO of Cornucopias. “This optimism is partly based on the recent approval of 11 spot Bitcoin ETFs by the SEC, however, Gensler's cautionary statements suggest that the Commission's approval of Bitcoin ETFs does not necessarily indicate a similar stance towards Ethereum ETFs.”
“Similar to the spot Bitcoin ETFs, several major firms, including BlackRock, VanEck, ARK Invest and 21Shares, Fidelity, and Invesco Galaxy, have filed applications for spot Ethereum ETFs,” he noted. “If the SEC decides to approve Ethereum ETFs, it is possible that multiple applications might be approved, as was the case with Bitcoin ETFs and the SEC has set specific deadlines for these decisions, ranging from May 23 to August 7, 2024.”
“Approval of a spot Ethereum ETF would be a landmark event for the crypto ecosystem. It would signify a further step towards regulatory acceptance and integration of cryptocurrencies into the mainstream financial system,” Greig said. “This could lead to increased confidence in cryptocurrencies, potentially spurring innovation, adoption, and the development of new financial products within the crypto space. Moreover, over the recent months, ETH has trailed behind BTC. The granting of approval is poised to act as a catalyst, propelling Ethereum to new heights.”
Adam Berker, senior legal counsel at Mercuryo, said there are two ways to look at the potential approval of a spot ETH ETF.
“Firstly, Ethereum, the second largest and most widely recognized cryptocurrency following Bitcoin, presents a valuable platform for large funds to enter the market,” he said. “Also, these requests originate from high-profile entities like BlackRock and Grayscale, both of which have considerable influence and a robust operational history. So, if the same requirements for Ethereum ETFs are met, there might be a positive decision as with Bitcoin ETFs approval. We can also see multiple application approvals as with BTC ETFs.”
The market might be waiting for ETH ETFs because Bitcoin's potential has already been realized in the spot ETFs, potentially making Ether the next chapter in this narrative,” Berker said.
“On the other hand, the important risk is that regulators don’t have a unanimous opinion on Ethereum (unlike Bitcoin),” he added. “In regards to Ethereum, the CFTC has previously expressed its view that it is a commodity, not a security. But the SEC confirms ‘everything other than Bitcoin’ is a security. In this situation, it is not very clear how this decision will affect the final decision of the SEC according to Ethereum ETFs approval.”
“All in all, if the approach to Ethereum ETFs is the same as with Bitcoin, we could witness a positive decision,” he concluded. “In the current situation, only the uncertain status of ETH nature might become an obstacle to the Ethereum ETF boom. From the regulator’s point of view, the practice of approving ETFs and the legal framework required for it are both things that already exist.”
Aurelie Barthere, principal research analyst at Nansen, told Kitco Crypto that the approval of a spot ETH ETF “is very likely.”
“BlackRock appears to have already filed for an ETH spot ETF with the SEC last November,” she said. “ETH is the next logical crypto underlying for an ETF. Quite a few tailwinds are aligning for ETH and L2 token prices in our view this Q1: anticipation around the spot ETF approval but also the Cancun upgrades of the Ethereum blockchain.”
According to Jeff Owens, co-founder of Haven1, “There are a lot more considerations and open questions around Ethereum as an asset class versus Bitcoin.”
“Bitcoin is relatively simple, as it is cleared as a non-security and the only utility for Bitcoin is to hold it as a store of value and transfer peer-to-peer,” he said. “Ethereum is another question entirely given questions around proof-of-stake mechanisms and the ability to earn interest, along with the general utility of Ethereum as an asset that powers an ecosystem.”
“Post approval and listing of the BTC ETF, the price of Ethereum jumped from ~$2,200 to over $2,600,” said Pelli Wang, co-founder of Bracket Labs. “This market activity indicates that traders are already pricing in that all of the ETH ETF will be approved together in May 2024.”
Ether staking
On the topic of Ether staking and how firms would navigate the issue should a spot ETH ETF be approved, Martin Lee, data journalist at Nansen, said how firms respond to staking would likely align with how they have responded to cryptocurrencies thus far.
“Firms that would hold and stake ETH vs those buying ETFs are likely very different,” Lee said. “Those that are willing to hold ETH directly and stake it would likely already be in the space and doing so. Those that aren’t doing that due to regulation/mandate or are more conservative would likely stick to buying ETFs for exposure.”
“It creates some novel questions in the fund context that did not need to be dealt with in the BTC applications such as: Will ETH ETFs stake? If so, how, and with whom? What happens if a fund validator gets slashed? How will the fund manage liquidity and redemptions of staked ETH?” said Hertlein.
“I don't think these issues are insurmountable,” he said. “After all, the funds register under a disclosure regime and all of these things can be disclosed, but it will no doubt take some good lawyering and lots of back and forth with SEC staff to get ironed out.”
“Assuming the ETH ETFs are going to stake, investors would have two options: buy ETH and stake it directly or buy shares of the ETF and let the fund manager do it for you,” Hertlein said. “Direct staking will always generate higher rewards at lower fees. So, direct staking is the higher-yielding option, but at the cost of some convenience and personal responsibility (although Ledger Live makes directly staking ETH nearly as easy as buying an ETF!). I expect that both options will appeal to people based on their priorities.”
Raul Calvo, co-founder of Diva Staking, said “Staking actually makes the approval a bit more complex, since it needs to be compounded and it poses certain legal complexities. All in all, an ETH ETF approval may as well be perceived as a regulatory reinforcement of staking-based systems.”
“Those are different products with a different profile of users,” he said. “There are a ton of firms that simply cannot hold and stake ETH (due to regulatory and technical constraints) but that can hold an ETF. For example, from an AML and risk perspective, the approach of a regulated fund holding ETH is totally different than a fund holding a ‘traditional’ product such as an ETF.”
Owens also said staking is “one of the complications that does not come with Bitcoin.”
“Some ETFs may elect to stake their Ethereum and provide rewards to their customers or even lower management fees,” he said. “However, managers would need to account for lock-up periods (or unbond periods), or they could use liquid staking, which takes on counterparty risk.”
“This is a holder-by-holder decision,” Owens said. “ETFs offer ease of use and no need for custody, whereas holding the raw asset and staking requires custody and knowledge of the blockchain. Some investors will be able to handle this additional complexity, while others won’t.”
“In general, the ETH ETF has many more open questions than even the BTC ETF had due to Ethereum’s utility, earning capabilities and centralization of validators,” he concluded. “This complicates matters more than in the case of the Bitcoin ETF.”
“Investors absolutely will want to hold staked ETH (or any safe alternative such as cbETH) for additional yield, but not all funds/investors have the ability to invest in it,” said Chris Martin, head of research at Amberdata.
“For example, many money managers and funds have strict guidelines and ETFs give them the opportunity to invest in the underlying digital asset,” he said. “Given the rumors of certain entities (like Vanguard) blocking their customers from investing in the ETH ETFs, I think we'll see these investment companies change their views on the asset class quickly given the customer demand, and funds entering the space slowly (don't forget, token prices are at yearly highs).”
“Technology often moves fast, but adoption moves slow,” Martin said. “Once investors start to get a feel for how digital assets work, we'll see more native adoption (i.e., users on the blockchain) over the course of the year and beyond. We're only getting started, and there are many more waves to pave.”