The United States Securities and Exchange Commission surprised the crypto community on May 23, 2024 when it effectively approved the sale of spot Ether Exchange-Traded Funds (ETFs).
First, some historical context. In 2013, Gemini founders Tyler and Cameron Winklevoss first sought to launch a Bitcoin ETF. The SEC rejected that application and, for about 10 years, rejected all other applications to list spot Bitcoin ETPs (an Exchange Traded Fund is the most common type of Exchange Traded Product). In each case, the SEC found the applicant was unable to meet the standard in Section 6(b)(5) of the Securities Exchange Act of 1934 which requires, in relevant part, that the rules of a national securities exchange (like NYSE Arca) be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.” In October 2021, the SEC approved two Bitcoin ETFs, but they were funds that traded in Bitcoin futures, not in Bitcoin themselves, finding in both instances that the relevant listing exchange had a surveillance sharing agreement with the Chicago Mercantile Exchange (“CME”) that the SEC viewed as satisfying its “significant market test.” See our post here. Likewise, the SEC approved two additional Bitcoin futures ETFs in April and May 2022 relying on the same rationale.
On June 29, 2022, the SEC rejected Grayscale’s application to convert the Grayscale Bitcoin Trust to a spot Bitcoin ETF listed on NYSE Arca. It repeated its same position concerning Section 6(b)(5). That same day, Grayscale filed a petition to review the decision with the D.C. Circuit Court of Appeals. On August 29, 2023, the D.C. Circuit sided with Grayscale, finding that Grayscale provided substantial and salient evidence that its proposed spot Bitcoin ETF was materially similar on relevant regulatory factors to the Bitcoin futures ETFs approved by the SEC.
Less than four months after the SEC’s loss, in its first landmark decision this year concerning cryptocurrency ETFs, on January 10, 2024, the SEC approved the application for eleven Bitcoin ETFs. Since then, Bitcoin has hit record highs and more than $30 billion has been invested in the Bitcoin ETFs.
Ether (ETH), the native coin of the Ethereum blockchain, is the second-largest cryptocurrency by market capitalization after Bitcoin. Not surprisingly, after the Bitcoin ETF approval, numerous applications were made to he SEC for approval of an Ether-based ETF. There had not been much recent engagement with the SEC on these applications. However, on May 23, 2024, in its second landmark decision in five months, the SEC approved the 19b-4 form on a number of Ether ETF applications (form 19b-4 is a form that is used to inform the SEC of a proposed rule change by a self-regulatory organization). Specifically, the SEC cleared (i) Cboe BZX to list the product from VanEck, Fidelity, Franklin Templeton, ARK 21 and Invesco Galaxy, (ii) NYSE Arca to list the product from Grayscale and Bitwise, and (iii) Nasdaq to list the product from BlackRock.
In the case of the Bitcoin ETFs, the funds started trading the day after approval because the asset managers’ registration statements (known as S-1s) were approved concurrently with the rule change. That was not the case with the Ether approval, where only the 19b-4 was approved. Before trading can commence on the Ether ETFs, the funds will need approval of their S-1 disclosures, which will include the details of the funds, such as fees and the way the products will work. There is no deadline for the SEC to approve the S-1s and, accordingly, this could theoretically take weeks or months, though the expectation is that it will happen relatively quickly.
The timing is especially interesting because, as part of the SEC’s ever more aggressive regulation by litigation practice, some in the industry were expecting the SEC to sue on the issue of Ether being a security. SEC Chairman Gensler has in fact stated that tokens other than Bitcoin are securities, which was contrary to the position the SEC had taken in the past. Indeed, as we reported here, on April 26, 2024, Consensys Software Inc., a software developer whose business centers on the Ethereum blockchain network, sued the SEC in federal court in Texas over the regulation of Ethereum. Approval of the Ether ETFs certainly suggests that the SEC will formally abandon the position that Ether is a security.
In sum, on the immediate horizon is the approval of the Ether ETFs themselves. After that, one has to wonder which cryptocurrency might be next up as a candidate for an ETF.
