If the SEC Thinks Ethereum Is a Security, Are ETH ETFs Doomed?

Will the SEC approve an Ethereum ETF this year?

Optimism among market participants is fading—and now that the SEC’s stance on Ethereum as a security has been made public, those hopes may have been shot down for good.

“If this SEC approves a spot Ethereum ETF before the election, I will eat my HODL hat,” Matthew Sigel, head of digital assets research at Van Eck, an Ethereum ETF applicant, told Decrypt.

That’s because of a lawsuit filed last week by Ethereum software company Consensys against the SEC, which revealed that the Commission believes Ethereum (ETH) to be an unregistered security—and that the SEC has, for the last year, pursued investigations on that basis. Consensys wants a court to declare Ethereum as a non-security, preempting any forthcoming charges from the SEC. (Disclosure: Consensys is one of 22 investors in Decrypt.)

To be clear, the SEC has yet to bring charges against Consensys, or anyone else, that formally allege Ethereum is a security. But the revelations in the Ethereum giant’s lawsuit have already had far-reaching implications, with top Washington lawmakers accusing SEC Chair Gary Gensler of lying to Congress last year about the agency’s position on ETH.

While the long-term impact of SEC’s investigations into Ethereum plays out, in the more immediate term this means spot Ethereum ETFs likely aren’t happening—at least, not without another legal fight.

Spot market Ethereum ETFs would allow Wall Street firms and investors to gain indirect exposure to ETH without having to deal with crypto exchanges or wallets. After a decade of denials from the SEC, spot Bitcoin ETFs finally gained approval for trading in the U.S. market in January—but only after Grayscale, one of the biggest digital asset managers in crypto, successfully sued the SEC to make it happen.

Still, after Bitcoin ETFs got the green light, analysts assumed spot ETH ETFs were right behind, with approval likely by summer. Now analysts and ETF issuers on Wall Street aren’t so sure.

Ethereum ETF applicants are expected to hear back from the SEC regarding approval by May 23. By last month, analysts were already cooling on the prospect that these initial filings would gain approval; this week’s news has only further convinced experts that ETH ETF applications have a ways to go.

Eric Balchunas, Bloomberg’s senior ETF analyst, opined on Twitter this week that the SEC’s now-evident position on ETH’s security status likely means spot ETH ETFs aren’t coming to Wall Street any time soon. And that’s because ETFs based on commodities and securities operate on different rules, he said.

Yes dif rules, 33 act for commodities

— Eric Balchunas (@EricBalchunas) April 29, 2024

It doesn’t appear, though, that the SEC’s apparent hostility towards Ethereum has spooked would-be ETH ETF issuers—at least not yet. A spokesperson for crypto fund manager 21Shares, the first-ever Ethereum ETF applicant in the U.S., told Decrypt that the firm remains committed to seeing its petition approved.

Van Eck, a more traditional Wall Street investment firm, remains all-in as well.

The company’s digital assets research chief Matthew Sigel believes the product will be approved “in time.”

But he emphasized that Van Eck’s experience bringing crypto to Wall Street has never been without conflict. This week’s news constituted just one additional bump in a road the firm always expected to be long and winding.

“This has been war since January of 2022, it’s been a war for the entire Biden tenure,” he said. “Part of our investment thesis for this asset class is that it will continue to win the bigger battles in the courts over time.”

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