The SEC’s green light for Bitcoin ETPs sparked a crypto rally.
Now, all eyes are on Ether, the world’s second-largest cryptocurrency.
Will Ether follow a similar path with a potential May debut for its own ETP, or will the SEC throw up roadblocks?
We explore the challenges, timeline, and implications for the future of crypto.
The Crypto Rally and the Rise of ETPs
Over the past 10 weeks, the cryptocurrency industry has been on a remarkable journey following the Securities and Exchange Commission’s green light for listing 11 bitcoin exchange-traded products (ETPs).
This move sparked a significant surge in the world’s most popular digital asset, boosting its value by a staggering 40% and propelling it to new record highs.
This impressive rally vividly reminds us of the inherent volatility within the crypto space.
It also highlights why cryptocurrency proponents fought tirelessly for the approval of these ETPs.
Now, investors eagerly anticipate the potential impact of an exchange-traded wrapper on ether, the second-largest digital asset by market capitalization.
The Race for an Ether ETP
Industry analysts are eyeing a potential debut of an ether ETP as early as May, with expectations of attracting over $45 billion in investments within the first year alone.
Prospective issuers share this optimism, considering the remarkable performance of the digital asset during the ongoing crypto rally, where it has surged by more than 102% over the past 12 months.
Ether investors eagerly await the application of the legal strategies that successfully secured approval for bitcoin ETPs from the SEC.
However, SEC Chair Gary Gensler is expected to present stronger legal arguments against an ether ETP.
In a recent CNBC interview, Grayscale CEO Michael Sonnenschein expressed confidence in the certainty of a spot ether ETP, stating that it’s not a matter of “if” but “when.”
Sonnenschein argued that since the SEC greenlit an ether futures exchange-traded fund last fall, it would need more grounds to block a spot ether ETP.
However, following news reports on Wednesday, March 20 2024, doubts arose, revealing that the SEC had issued subpoenas to several companies for information regarding their interactions with the Ethereum Foundation, a Swiss-based nonprofit supporting the protocol.
Some analysts speculate that this move could begin an effort to classify ether as a security and intensify regulations on ether trading.
In a post on X , Brian Quintenz, the global head of policy at a16z crypto and a former Commodity Futures Trading Commission commissioner, highlighted an intriguing point: the SEC’s decision to allow ether futures ETFs to commence trading last fall suggests that the agency doesn’t classify ether as a security.
However, shortly, there may be a smoother path for the approval of an ether spot ETP.
Bitcoin ETPs vs. Ether ETPs: A Tale of Two Assets
The approval of a bitcoin futures ETP by the SEC in 2021 led to a legal challenge by Grayscale against the regulator.
Courts ruled in favor of Grayscale, deeming the SEC’s decision “arbitrary and capricious” because it permitted one type of ETP while rejecting another, especially considering the close tracking of bitcoin futures prices with spot market prices.
The situation with ether futures ETF approval differs because, unlike bitcoin, the SEC has only approved the rules outlined by the Investment Company Act 1940. This act governs most investment funds marketed to retail investors, such as mutual and exchange-traded funds.
Funds approved under the 1940 act face heightened scrutiny from the SEC and are subject to a fiduciary duty standard, along with restrictions on leverage, fees, and other potentially harmful practices.
ETPs vs. ETFs: Understanding the Nuances
Benjamin Schiffrin, a former associate general counsel for the SEC and director of securities policy at Better Markets, emphasized distinguishing between exchange-traded products registered under the 1940 act and those approved for trade under less stringent oversight standards.
He noted that despite being referred to as ETFs, the 11 recently approved bitcoin ETPs technically do not fall under this category.
“There’s a significant distinction between ETPs and ETFs,” Schiffrin explained. “ETFs are widely recognized investment products that many retail investors own, typically tracking an index or a basket of securities.”
He elaborated, “Spot bitcoin ETPs are often marketed as ETFs to provide investors with a sense of familiarity, but they are fundamentally different investment vehicles.”
While both types of products may be traded on exchanges, their regulatory frameworks and underlying structures vary significantly, highlighting the importance of investor awareness and understanding.
Lawmakers and Investor Protection
Lawmakers have raised concerns regarding assertions made by issuers of Bitcoin spot ETPs.
Democratic Senators Jack Reed of Rhode Island and Laphonza Butler of California penned a letter to SEC Chair Gensler on March 11, 2024, urging the commission to examine brokers’ and advisers’ communications regarding bitcoin ETPs closely.
They aim to ensure that investors are not misled about the nature of these products and to advocate for the prevention of any further crypto ETP launches.
Their letter highlighted the significant risks retail investors could face from ETPs referencing thinly traded cryptocurrencies or those vulnerable to pump-and-dump schemes or other fraudulent activities.
They emphasized that the SEC is not obligated to approve such products and, given the risks involved, should refrain from doing so.
The Road Ahead: Collaboration and Regulatory Solutions
The remarkable success of bitcoin spot ETPs, attracting over $66 billion in inflows in less than three months, underscores why the SEC will subject an ether spot ETP to heightened scrutiny.
Benjamin Schiffrin noted that retail traders are more inclined to invest in a spot ether ETP than a futures ETF due to their broader availability and lower costs.
“Cryptocurrencies, including ether, have shown susceptibility to manipulation,” Schiffrin remarked, emphasizing the prevalence of wash trading and the challenge regulators face in protecting investors from fraudulent and manipulative activities, as mandated by law, before approving rule changes.
Wrapping Up
The cryptocurrency landscape is undergoing significant scrutiny and evolution as regulators, lawmakers, and industry experts grapple with the complexities and risks of exchange-traded products (ETPs) in the crypto space.
In this ever-evolving landscape, collaboration between industry stakeholders, regulators, and policymakers is essential to develop holistic solutions that foster innovation while safeguarding market integrity.
By leveraging our collective expertise and embracing a proactive regulatory approach, we can unlock the full potential of cryptocurrencies and usher in a new era of financial inclusion and empowerment.
Ultimately, the journey towards mainstream acceptance of digital assets requires a coordinated effort to address regulatory uncertainties, enhance market transparency, and promote responsible investment practices.
Through collaboration and informed decision-making, we can build a resilient and sustainable ecosystem that empowers individuals and drives economic progress.