SEC approval of Ethereum ETFs: what may it bring for the crypto market?

On May 23, the US Securities and Exchange Commission (SEC) approved eight spot  Ethereum or Ether ETF applications. These applications to be listed on US exchanges Nasdaq, CBOE and NYSE, may pave the way for the products to begin trading later this year after getting the green light.

This announcement marks a pivotal moment in the cryptocurrency market, underscoring a significant shift in the regulatory landscape for crypto in the US. These Ether ETFs however still need the final approval, before being officially launched.

In this blog I will describe what these ETFs are, the initial reactions on the Ethereum market, detailing the approval process, when they will be launched, what it may bring for the Ethereum market, and how the regulation will further evolve as well as the way forward.

What Is an Ethereum ETF?

An Ethereum ETF, or Ether ETF, is a crypto asset that seeks to track the spot market price of Ether, the native currency of the smart contracts Ethereum blockchain. These ETFs will allow investors to buy shares that track the Ether price by holding Ether futures contracts, while some Ether ETFs hold a mix of Ether and Bitcoin futures. They will be traded on traditional US stock exchanges, enabling investors to gain Ether exposure without dealing with the complexities of buying and storing the Ether itself.

The Ether ETF offers a number of benefits for investors. By being purchasable through a simple stock transaction, Ether ETFs provide investors and institutions with a quick, convenient and safer way to gain regulated access and exposure to incorporate Ether into investment portfolios. This could lead to increased liquidity, greater market participation, and a broader acceptance of Ether as a legitimate financial instrument.

Ethereum ETF SEC approval

On May 23 the U.S. Securities and Exchange Commission (SEC) announced the approval of eight spot Ether ETFs to be listed and traded on US exchanges. This is following the regulator’s approval of the first Bitcoin ETFs in January year.

“After careful review, the Commission finds that the Proposals are consistent with the Exchange Act and rules and regulations thereunder applicable to a national securities exchange.” SEC Chair Gensler.

Ethereum ETF applications
On that date, the SEC approved so-called 19b-4 applications from several asset managers that were also involved in the Bitcoin ETF sector. These include names like Fidelity, BlackRock, Bitwise, and Grayscale, as well as ETFs from Franklin Templeton, VanEck, Ark, and Invesco Galaxy.

Political or legal motivated
There is still discussion if this decision by the SEC was political or legal driven. Though some believe that this move was triggered by political pressures it is more likely that legal motivations are behind this approval. Analysts argue that the SEC’s approval of Ether ETFs was more likely a pragmatic decision to avoid legal conflicts, rather than a result of political influence.

The SEC, facing similar regulatory frameworks for both Bitcoin and Ether ETFs,  including the same spot and futures correlation and several live Ether futures products on the Chicago Mercantile Exchange, likely approved the spot Ether ETFs to avoid another legal battle.

An additional reason why the SEC may have approved these Ether ETFs, is the passing of the Financial Innovation and Technology for the 21st Century Act (FIT21) Crypto Bill in the US House of Representatives on May 22, seeking to provide regulatory clarity for cryptocurrencies, one day before the SEC approval.

First market reactions on Ether ETF approval

This SEC announcement has triggered a number of interesting reactions including a surge in in Ethereum investor inflows, substantial Ether outflows on crypto exchanges, lack of Ether price movement, as well as reactions in other markets such as Hong Kong.

Surge in inflows
After this approval Ethereum, has seen a significant surge in inflows. Investment products worldwide holding Ether saw a total of $69 million in investor inflows, the largest weekly inflow since March likely attributed to the surprising SEC decision to approve spot-based Ether ETFs.

Substantial ETH outflows on Crypto exchanges
In the first week since the SEC approved spot Ether ETFs, crypto currency exchanges have seen substantial Ether outflows, demonstrating the impact of regulatory decisions on market dynamics. Over $3 billion worth of Ether holdings – around 797.000 Ether - has been withdrawn from crypto exchanges by market participants since the SEC Ether ETF approval between 23 May and 2 June.

This massive withdrawal of Ether from crypto exchanges suggests a growing preference among crypto traders and investors to secure their holdings in anticipation of the launch of the spot Ether ETFs and further price growth and reduced selling pressure on exchanges. This is signalling an impending  supply shortfall. A reduction in exchange reserves suggests that fewer coins may be available for purchase as investors transfer their holdings to self-custody for uses other than immediate sale.

Ether price: lack of movement
The price of Ether rose by 20% to reach nearly $4.000 on May 23, after reports suggested the SEC signalled a willingness to approve the Ether ETFs, and more than 60 percent year-to-date. Since the announcement of the approval the Ether price hardly moved and even fell back to below $3.500. This lack of movement reflects the notion that “everyone who wanted to buy the approval already did.”

Reactions in other markets: Hong Kong

Meanwhile, the surge in interest for spot Bitcoin ETFs and the attention spot Ethereum ETF applications are generating in the US have also catalysed developments elsewhere. Next to Canada that already approved Ethereum ETFs since 2021, these ETFs were also recently been approved by Hongkong. In April 2024, the Hong Kong's Securities and Futures Commission (SFC) granted conditional approval to several fund managers for both Bitcoin ETFs and Ether ETFs.


The Ethereum ETF approval process

The approval of Ether ETFs follows a strict process, highlighting the SEC’s measured approach to cryptocurrency regulation. The process contains a two-step approach: the first step is the approval of the 19b-4 fillings, followed by the second step including the review and approval of each of the eight funds’ individual S-1 registration applications. Both 19b-4 and S-1 forms must be approved before the Ether ETF could be launched. The approval of the 19b-4 and S-1 forms however would not happen simultaneously. This decision was based on the proposals meeting the criteria set by the Exchange Act, which aims to sustain the availability of information about securities transactions.

First step: approval of the 19b-4 forms
The first step was to grant approval by the SEC for eight Ether ETF issuers19b-4 forms to list spot ETFs on various US exchanges, thereby granting the initial round of applications. This step was concluded on May 23, just five months after the SEC gave its approval to Bitcoin ETFs.

19b-4 forms are regulatory filings issued to the SEC for approval and are used by exchanges to propose new rules of change existing ones. These forms are  specifically designed for the approval of rule changes by self-regulatory organisations like stock exchanges. They are used to propose and detail the specific structure, mechanics and operational guidelines of the ETF, directly impacting whether the SEC will approve the product for trading on an exchange  

In the days before the announcement on May 23, the SEC asked exchanges including  Nasdaq, NYSE and CBOE, to update 19b-4 forms on expedited basis, to address concerns about investor protection and regulatory oversight.

Ether ETF issuers were thereby asked to refile the 19b-4 forms making changes that could potentially create obstacles for the product’s approval. All removed plans to stake the token which suggests that activity might have been a regulatory roadblock.

Second step: approval of S-1 registration forms
The second step is for each individual issuer to get their registration statement or S-1 forms approved. This form is required by the SEC for ETFs to list securities, and establishing exchange agreements through multiple rounds of SEC communication. The SEC’s role is to guarantee investors have legally required disclosures and that exchanges are adequately regulated to deter fraud, market manipulation, and trading against their customers.

These forms are crucial for transparency and investor protection, and need to be declared effective before the ETFs can officially begin trading on US exchanges and are available to investors. The applicants were asked to update their filings and submit them before the end of May.

S-1 forms are registration statements that ETF applicants have to file with the SEC including information about the company and prospectuses for their ETF products they intend to offer including detailed investor disclosures. This should cover information about their financial condition, risk factors, and business operations, before going public.

Individual issuers are now working through the disclosure process with the SEC. The underlying exchange-traded products (ETFs) are going through a detailed review and disclosure process by the SEC in its interactions with individual ETF issuers. The agency is thereby studying various disclosure measures, whereby the issuers’ registration statements are still pending review.

This  indicates the Commission’s prudent approach to regulating these important financial instruments. This process usually involves a lot of back and forth between the ETF issuers and SEC officials, whereby the SEC gives feedback which may prompt changes to be made. It is expected that this iterative process may take several weeks or at most several months.

When may we expect the official launch of Ethereum ETFs?

Long time it has been unclear how long this process could take. Some analysts thought it could be a process of weeks while other are more cautious and avoid specific dates, but suggest that finalizing S-1 registration statements before we see S-1 approvals could take several months.

SEC Chair Gensler long time refused to say an exact date, telling the approval process will take some time, following progress in the regulatory approval process. Gensler’s comments indicate that regulatory complexities could delay earlier estimated timelines for actual listing and trading on US exchanges, and that the SEC would take months and not weeks to approve the S-1 filings.

But recently during a June 13 Senate Banking Committee hearing, Gensler provided a broader time frame for when spot Ether ETFs might begin trading, suggesting the process is working smoothly, while the  SEC’s recent feedback on S-1 filings from ETF issuers was “minor and primarily procedural”. He indicated  the SEC might approve S-1 registration statements for these ETFs during the Summer 2024, depending on how quickly issuers could address comments from the SEC.

What may Ether ETFs bring for the Ethereum market?

At what Ethereum ETFs could bring, analysts are looking at the great results of the ETF Bitcoin market. Many are waiting to see whether Ethereum would follow a similar trend. Experts however caution against unrealistic expectations, this given the differences between Bitcoin and Ethereum. Unlike Bitcoin, which saw​ a surge​ іn inflows with the launch​ оf its ETF, and as a result a spike in the Bitcoin price reaching $70.000, Ethereum’s ETF future may​ be less meteoric.

New Gateway for Investors
The approval of spot Ether ETFs as a legitimate investment vehicle is a major development, making Ethereum more accessible to investors, both retail, professional and institutional. Similar to the launch of spot Bitcoin ETFs in January, these new Ethereum products could broaden access for investors, including those who have been hesitant or reluctant to enter the market due to concerns about security, custody, and regulatory uncertainty

These Ether ETF applications may attract major financial institutions, who prefer to avoid the complexity of acquiring and directly safeguarding them to integrate Ether into traditional investment portfolios, directing greater capital towards the Ethereum ecosystem.

Reduction in circulating Ether supply
The SEC may permit these ETF products to trade in the US without including staked Ether. The surge in investment into Ether ETFs could translate into a substantial absorption of Ether from the market, which could lead to further limit the supply accessible to ETFs. The impending ETFs could thereby trigger a ‘massive supply shock’ that could kickstart a substantial surge in ETH’s price.

Inflows: Ether ETFs will not approach Bitcoin ETFs.

The introduction of the spot Ether ETF could trigger significant demand leading to a large influx of investment capital. Estimates are derived by extrapolating the performance of the first 100 days of the ten-spot Bitcoin ETFs that saw $12 billion in inflows during that period.

Though there “should be pent-up demand from the same participants as the Bitcoin ETF”, who will likely want to diversify into this second approved ETF. But given the differences between Bitcoin and Ethereum flows from Ethereum ETFs these inflows however will not approach those of Bitcoin ETFs funds, and may be less than initially anticipated, as major financial institutions such as JPMorgan have expressed caution.

Analysts expect Ether ETFs flows to be far lower than Bitcoin ETFs – expectations are between 20% and 30% of the Bitcoin ETF inflow within the first five months  - ranging from $3.1 billion to $4.8 billion. The anticipated inflows would amount to 800,000 to 1.26 million Ether accumulated in the ETFs at current prices
Grayscale’s outflow

Concerns however exist over how Grayscale’s Ether Trust could affect the price of Ether as well. Grayscale will convert its Grayscale Ethereum Trust into a spot instrument with high fees which will result in substantial outflows as was the case with its Bitcoin ETF offering. If it mirrors the initial pattern observed with its Bitcoin ETF that has shed a total of $6.5 billion within the first month following approval of the Bitcoin ETFs, Grayscale Ethereum Trust that has $11 billion in assets, may experience comparable outflows of about $2.5 to $ 3 billion, which could negatively impact market sentiment thereby suppressing the price of Ether

Ether price
Predictions for the Ether prices show great differences, ranging from relatively cautious to highly exuberant, depending on the views relating to the expected inflows and outflows as well as on the projected launch date. While the prevailing regulatory and economic challenges are likely to keep Ether's price in check in the short term, their long-term impact on the Ether price will depend on how they are rolled out and how investors respond.

Predictions are that Ether could reach $4.500, when signs of an approval date are becoming clear, while the official approval of spot Ether ETFs could lead to a further 50% to 60% rally in ETH prices reaching $ 6.750 to $ 7.200 at the end of 2024, if the presented predictions for the Ether ETF inflows will be realised. This may be similar to the market reaction seen after spot Bitcoin ETFs were approved in January. A supply squeeze brought on by the decrease in available supply could further raise prices as demand rises.

Longer term expectations are that the arrival of these ETFs could drive the Ether price tot new all-time highs because such products have been associated with similar market trends in the past. Asset manager VanEck has projected Ethereum (ETH) to reach $22,000 by 2030, based on its anticipated generation of $66 billion in “free cashflows.” 

Are Ethereum ETFs a security or a commodity?

There is still a lot of discussion on the issue: is Ether ETF a commodity now, or still a security as Gensler is suggesting? The answer is still unclear.
At the same June 13 Senate Banking Committee meeting, Gensler personally believes Ether to be a security. In his statements, he reiterated his view that most altcoins are securities. For others, the SEC approvals imply that Ether is a commodity rather than a security, thereby giving the industry more regulatory clarity going forward. The Financial Innovation and Technology for the 21st Century Act (FIT21) Crypto Bill, however aims to regulate cryptocurrencies as commodities.

Gensler and Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam were both asked whether Ether, the underlying cryptocurrency of the Ethereum network, is a commodity. Gensler didn't answer the question directly. He has not explicitly said Ether is a security, maintaining the uncertain position his Agency has held on that asset. Meanwhile, Behnam has asserted that Ether is a commodity following approvals of spot Ether ETFs. If Ether is a security, approval would not have been appropriate under these specific SEC exchange rules.


Which federal agency should have jurisdiction?

This issue is important when trying to seek the proper US supervisor for various tokens. That would influence future regulation of the digital asset sector.

As digital assets continue to gain mass adoption, there remains an ongoing debate over which federal agency should have jurisdiction over the regulation and enforcement of this new and innovative technology. If Ether and other similar cryptocurrencies are not securities but commodities, then the SEC lacks jurisdiction to regulate these assets under the Securities Act of 1933 and the Securities Exchange Act of 1934.

If correct in their assessment, then an Ether commodity would fall under the oversight of the Commodity Futures Trading Commission (CFTC). As a result, these tokens could be subject to potentially less stringent regulation under the CFTC. CFTC Chair Behnam noted the CFTC still doesn't have some of the necessary authorities for policing the crypto markets if – as certainly legislative efforts in Congress would direct – it gets more responsibility for overseeing crypto trading.

If Ether and similarly situated tokens are instead commodities, then this could green light a renewed motion to dismiss the SEC lawsuits against both Ripple, Coinbase and Kraken.

Who’s next?

Since the Ether ETF approval on May 23 there is growing speculation about ETFs for other altcoins. According to some financial analysts, this approval

could open the door to new cryptocurrency spot ETFs. In this scenario, leading cryptocurrencies such as Ripple XRP and Solana could be the next in line as potential candidates for spot ETFs. Both coins are firmly positioned in the crypto market, with market caps of $74.6 billion and $27.3 billion, respectively.

The prospect of multiple cryptocurrency ETFs would change both the cryptocurrency landscape and the ability of institutional investors to diversify their portfolios.

This scenario however still seems distant. Not everyone is certain that the Ether ETF approvals will soon lead to exchange-traded funds for other altcoins. It is unlikely at this stage that they would open “the door for everybody else” to launch their own funds. One needs to exercise patience and wait until at least 2025 to invest in them through an ETF.


Forward thinking

The SEC recent initial approval of Ether ETFs has sparked discussions about its broader impact for the digital asset industry. It not only suggests a promising outlook for Ethereum, but also underscores the accelerating pace of cryptocurrency adoption and the growing recognition of digital assets as integral components of the financial ecosystem.

The potential launch of an Ether ETF represents a pivotal moment for the broader cryptocurrency industry, helping to provide greater legitimation for the crypto sector as a whole and as another tailwind from crypto industry efforts to put into mainstream finance.  

The approval of Ethereum ETFs indicated a broader policy shift in favour of crypto, suggesting a more stable and predictable environment for digital assets. As the regulatory landscape further evolves, paving the way for a more structured and regulated crypto currency market, discussions surrounding digital assets’ future and their regulatory implications will be central.

That is also sustained by the passage FIT21, that should be seen as crucial steps towards regulatory clarity. One should thereby emphasize the positive regulatory aspects and the significance of regulatory guidance for the future of crypto.