The SEC’s Approval of Spot Ether ETFs: What It Means for the Crypto Market

Key Takeaways

• The Securities and Exchange Commission (SEC) on Thursday approved a rule change that will allow the listing of spot ether exchange-traded funds (ETFs) in the future.
• However, because of remaining regulatory steps in the process, the new ETFs likely won’t be available for trading until July or August.
• The approval from the SEC, which seemed unlikely a week ago, may indicate a positive change in the regulatory environment for the crypto industry in the U.S.
• The inflows of funds into these new ether products may be limited by the lack of access to staking that rewards users for their liquidity.

On Thursday, the U.S. Securities and Exchange Commission (SEC) surprised market watchers when it effectively approved the listing of spot ether exchange-traded funds (ETFs) on U.S. exchanges. Ether is the underlying cryptocurrency of the Ethereum crypto network, the second-largest such network after bitcoin by market capitalization.

Spot Ether ETFs May Not Be Listed for Months

While Thursday’s decision to approve spot ether ETF 19b-4 forms from issuers hoping to launch the funds was a major step forward, the associated products in the works from BlackRock, Grayscale, Fidelity, and others can’t be listed quite yet.

That’s because the S-1 registration filings submitted for these products must also be approved, which could take anywhere from weeks to months. According to a report from Galaxy Digital, July or August are the likely months when spot ether ETFs will begin trading.

The SEC’s Change of Heart

The SEC’s recent turnaround to approve spot ether ETF applications wasn’t predicted by many before some major developments earlier this week. The SEC had asked spot ether ETF applicants to make alterations to their filings on an accelerated basis as the deadlines for the agency’s decisions on them were approaching.

There appears to have been a reversal of policy behind the scenes at the SEC, which in the crypto industry view as political in nature. An unidentified source told the crypto publication The Block that the decision was “a completely unprecedented situation, which means it’s entirely political,” due to the lack of internal coordination among SEC departments on the matter.

Earlier in May, former President Donald Trump in a speech courted the crypto industry that the Biden administration has moved to regulate, a shift from Trump’s criticism of cryptocurrency during his presidential term.

The recent SEC decision on spot ether ETFs also could have implications for the broader crypto industry. While Republicans generally have been receptive of crypto and blockchain technology, especially in terms of bitcoin, Democrats have been mostly seen as opponents of the technology.

Democrats, led by the Biden administration, taking a softer regulatory approach on crypto may mean more crypto businesses and projects would be likely to consider the U.S. for their base of operations.

In addition, the pivot on the spot ether ETF ruling could have implications for ether’s status as a security, which is a legal avenue the SEC had been exploring. According to Bloomberg analyst James Seyffart, the SEC is explicitly saying with these recent approvals that ether is not a security, as the future ETFs are referred to as commodities-based trust shares.

How Will These ETFs Affect Ether’s Price?

Ether rose about 20% this week, but opinions differ on how much higher the price can go. While bitcoin has benefited robustly from the approval of spot bitcoin ETFs, with those products experiencing roughly $13 billion of inflows since their approval in January, it’s unclear if Wall Street will have a similar appetite for ether.

Notably, futures-based ether ETFs didn’t gain much traction after they launched in 2023.

Also, the existence of an earlier ether fund from digital asset manager Grayscale could limit inflows to the new ETFs over the short term, as was the case with a similar bitcoin product. That said, some analysts still think that the spot ether ETF approvals can help the alternative crypto asset outperform bitcoin.

One of the key limitations of spot ether ETFs, at least for now, will be their lack of access to staking. Ether can be staked on the Ethereum network to participate in the consensus and validation process, similar to the proof-of-work mining process in bitcoin.

Stakers are rewarded with transaction fees and newly issued ether, which allows them to earn a yield on their ether in exchange for their liquidity. Because ether held by ETF issuers can’t be staked, opting for a spot ether ETF instead of an alternative option to buy into the cryptocurrency will come with tremendous opportunity cost.

Overall, the approval of spot ether ETFs by the SEC marks a significant milestone for the crypto industry in the U.S. It signals a potential shift towards more favorable regulations and could open up new opportunities for investors looking to gain exposure to ether through traditional financial products.