Forbes: Is Bitcoin's surge a blessing or a trap for Ethereum ETFs?
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Forbes: Is Bitcoin's surge a blessing or a trap for Ethereum ETFs?
Before the launch of spot Ethereum ETFs, an open question remains: Is ETH a commodity or a security?
Navigating Web3 tides with focused insightsBy Steven Ehrlich, Forbes Staff
Translated by Luffy, Foresight News
Spring has come early to the crypto world. Bitcoin is trading above $60,000, up more than 167% over the past 12 months. In less than two months since the launch of spot bitcoin exchange-traded funds (ETFs), over $7 billion has flowed into these new funds. Markets are now eagerly anticipating the potential approval of spot Ethereum ETFs, with ETH currently boasting a market capitalization exceeding $400 billion—second only to Bitcoin’s $1.2 trillion-plus valuation. The U.S. Securities and Exchange Commission (SEC) could issue final decisions on nine spot Ethereum ETF applications as early as May. But unlike the January approval of bitcoin ETFs, which seemed preordained, Ethereum’s path forward is far less certain.
The most immediate concern is whether the SEC will classify Ethereum as a security, meaning it would need to be registered and regulated under the Investment Company Act of 1940. Most ETFs, such as QQQ or the SPDR S&P 500 Trust, fall under what's known as the "40 Act" because they consist of baskets of stocks or registered securities. While crypto trading and activity resemble securities markets in many ways, the crypto community broadly insists that the thousands of different cryptocurrencies underpinning an emerging industry worth over $2 trillion are not securities. In fact, they bristle at the idea that “cryptocurrencies are securities,” calling it a betrayal of the decentralized ethos behind Bitcoin’s creation 15 years ago. When the SEC approved spot bitcoin ETFs in January—after more than a decade of waiting—it somewhat validated these beliefs, acknowledging under the Securities Act of 1933 that Bitcoin itself is a commodity.
So far, the SEC has avoided directly addressing whether Ethereum qualifies as a security, although in its June 2023 lawsuit against Coinbase, it claimed that many tokens—including those linked to blockchains like Cardano and Solana, essentially clones of Ethereum—are inherently securities. SEC Chair Gary Gensler has remained silent on Ethereum’s status. During a congressional hearing in June 2023, House Financial Services Committee Chair Patrick McHenry pressed Gensler on whether Ethereum is a security or a commodity. At the end of a widely criticized exchange, Gensler most commonly replied, “I don’t think you want me to prejudge…”
If the SEC determines Ethereum is a security, it would require Ethereum ETF issuers to treat it as such in their applications for approval. While this may seem like mere legal paperwork, doing so would be seen as an affront to crypto insiders and idealists, and could cast doubt on the status of thousands of other cryptocurrencies. Yet, given the billions of dollars at stake in the nascent crypto ETF market, firms that can quickly capture market share—like BlackRock, Invesco, or Fidelity—could benefit from clear regulatory direction from the SEC.
“Ultimately, we’ll file under whatever jurisdiction or regulation the SEC wants,” said one applicant who requested anonymity.
Ethereum, created in 2015 by Vitalik Buterin and others, is the second-most important blockchain in the world after Bitcoin. It differs from Bitcoin in that it allows developers to freely build countless applications on top of it—commonly referred to as smart contracts. Its success is critical to a vast ecosystem of companies like Nike, Circle, Uniswap, and Blur, whose businesses span payments, decentralized finance, gaming, and NFT applications. In terms of performance, Ethereum’s price has doubled over the past 12 months.
Ethereum’s origin story differs significantly from Bitcoin’s—a distinction that has piqued the interest of SEC lawyers. Bitcoin launched in 2009 when a pseudonymous developer known as Satoshi Nakamoto mined the first so-called block, after which anyone could join the network as a miner and earn newly minted bitcoins without any pre-allocation to founders. In contrast, Ethereum conducted a crowdfunding campaign via an initial coin offering (ICO) in mid-2014, while the founding team led by Vitalik Buterin retained a portion of the 72 million ETH created at launch. In many respects, Ethereum’s ICO resembled how company founders issue stock during an initial public offering.
One key factor in determining whether something is a security relates to centralized control—an issue relevant to Ethereum’s early days, when the peer-to-peer network was governed by a small group of developers. Over time, however, Ethereum and its governance have become increasingly decentralized.
Bill Hinman, who served as the SEC’s Director of Corporate Finance in 2018, stated: “Putting aside the fundraising activities associated with Ethereum’s creation, based on my understanding of the current state of Ethereum, the Ethereum network, and its decentralized structure, the current offer and sale of Ether does not constitute a securities transaction.”
Another conflicting signal emerged from the launch of Ethereum futures ETFs last fall, such as VanEck’s Ethereum Strategy ETF and ProShares’ Ether Strategy ETF. “If the SEC intended to take the position that Ethereum is a security, one might have expected them to act when they allowed Ethereum futures funds to launch last year, since those funds hold ETH futures that are specifically regulated as commodities by the CFTC—not as securities,” said Greg Xethalis, General Counsel at crypto venture firm Multicoin Capital. On the other hand, New York-based Prometheum—the only FINRA-registered broker-dealer granted special permission to custody and trade digital assets—plans to launch custody and trading services for Ethereum this spring, categorizing it as a “crypto asset security.”
Prometheum CEO Aaron Kaplan views Ethereum as a security. “If you really think about it, Gary Gensler has consistently said that nearly every cryptocurrency besides Bitcoin is a security.”
The potential profits for the first spot Ethereum ETF issuer could be substantial. In October 2021, ProShares launched the first bitcoin futures ETF—ProShares Bitcoin Strategy ETF (BITO)—two weeks ahead of competitors. On its first day, it attracted over $1 billion in inflows and has since dominated the crypto futures ETF space. With $2 billion in assets and a 0.95% annual fee, BITO holds 90% market share. GBTC, the earliest mover in the Bitcoin fund space, maintains dominance despite charging a 1.5% fee—more than four times that of its spot Bitcoin ETF rivals—with $26 billion in assets compared to BlackRock’s $9 billion.
If that competitive advantage weren't enough, there's an additional incentive baked into the regulatory process. Spot commodity ETF applications filed under the Securities Act of 1933 have a 240-day review or approval window for SEC scrutiny. These filings require the listing exchange (such as Nasdaq or NYSE) to submit not only an S-1 form for the new security but also a separate Form 19b-4. As Giang Bui, Head of U.S. Equities and ETPs at Nasdaq, explained, these documents are reviewed by two different divisions within the SEC and follow separate timelines. The S-1 is evaluated by the Division of Corporation Finance, while the 19b-4 is assessed by the Division of Trading and Markets.
If spot Ethereum ETF applications are filed under the 1940 Act, issuers need only submit a Form N-1A as their registration statement, which is reviewed by the SEC’s Division of Investment Management. This streamlined approach means 40 Act applications become effective in just 60 days instead of 240. On Wall Street, that shortened timeline can make or break a product launch.
For the broader crypto industry, approving a spot Ethereum ETF under the 1940 Act could cause significant market disruption—especially in the spot Ethereum market. The pricing mechanism for this cryptocurrency could come under scrutiny, as many key exchanges that determine price—such as Coinbase and Kraken—are neither registered nor authorized to trade securities. When Ripple’s XRP token was sued by the SEC in December 2020, several exchanges including Coinbase and OKCoin delisted the digital asset. Given Ethereum’s significance, few expect ETH to be delisted—but if it were, demand could suffer. The smooth functioning of deep, orderly markets is a critical component of any ETF application. Coinbase is a particularly prominent player in this drama, positioning itself to provide custody and prime brokerage services for new crypto ETF products. Indeed, the company’s chief legal officer, Paul Grewal, sent a letter to the SEC at the end of February urging approval of the pending spot Ethereum ETF applications. In the letter, Grewal asserted: “Ethereum is a commodity, not a security.”
With nearly three months still remaining before the SEC must rule on the current batch of spot Ethereum ETF applications, it’s difficult to predict which perspective will prevail. “The challenge we face is that the Commodity Futures Trading Commission (CFTC) says Ethereum is a commodity, the SEC previously said Ethereum is a commodity, and now under new leadership they’re saying Ethereum could be a security,” said Annemarie Tierney, a lawyer at cryptocurrency advisory firm Liquid Advisors. She also pointed out that the SEC explicitly excluded Ethereum from its securities violation lawsuits against Coinbase, Kraken, and Binance. “In none of their enforcement actions against exchanges have they listed Ethereum as a security, so I don’t know what to make of that.”
Either way, don’t expect potential spot Ethereum ETF issuers to cling tightly to crypto industry ideals. “The SEC has done contradictory things in the past,” said one applicant that already brought a spot Bitcoin ETF to market. “If they say we can only bring a spot Ethereum ETF to market under the 1940 Act, then we’ll certainly keep that option on the table.”
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