SEC unlikely to approve Ether ETF over proof-of-stake

Rick Steves

Last week, the SEC announced it is seeking public comments on a trio of proposed spot ether exchange-traded funds (ETFs), as per recent regulatory filings.

Ethereum

The U.S. Securities and Exchange Commission (SEC) is reportedly unlikely to approve an exchange-traded fund (ETF) for ether, the cryptocurrency of the Ethereum network, due to concerns related to its proof-of-stake design.

This news emerged during the Paris Blockchain Week, where executives from leading financial institutions voiced their skepticism regarding the approval of ether ETFs by the late May deadline.

The companies in question, including giants like BlackRock, Fidelity, and VanEck, had previously seen the SEC approve spot bitcoin ETFs and were hopeful for a similar outcome for ether.

SEC Chair Gensler said most cryptos are securities

Despite the growing enthusiasm in the crypto community for an ether ETF, sparked by the SEC’s approval of bitcoin ETFs earlier in the year, the regulator’s concerns over the proof-of-stake protocol and the broader classification of cryptocurrencies as securities cast doubt on the immediate future of such investment products.

The SEC’s hesitance is also influenced by statements from SEC Chair Gary Gensler, who has indicated that most cryptocurrencies, by the agency’s standards, qualify as securities and are thus subject to federal securities laws.

This stance presents a significant hurdle for ether, given its transition to a proof-of-stake mechanism, which differs fundamentally from bitcoin’s proof-of-work basis. Proof-of-stake and proof-of-work are different blockchain consensus mechanisms, the former of which Ethereum has adopted to validate transactions and create new ether.

SEC seeks public comments on proposed ether ETFs

Last week, the SEC announced it is seeking public comments on a trio of proposed spot ether exchange-traded funds (ETFs), as per recent regulatory filings.

The ETFs in question include the Fidelity Ethereum Fund, Grayscale Ethereum Trust, and Bitwise Ethereum Trust. On Tuesday, the SEC issued a notice specifically regarding the Bitwise proposal, stating, “The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 1, from interested persons.” The public has been given a 21-day period to submit their comments on all three proposed ETFs.

However, the mood surrounding the potential for the SEC’s approval of these spot ether ETFs has notably shifted. Once buoyed by optimism, the sentiment has taken a downturn. Bloomberg ETF analyst Eric Balchunas revised his expectations for approval by May from an initial 70 percent to a now more conservative 30 percent.

Further dampening hopes, James Seyffart, another ETF analyst at Bloomberg, voiced his concerns following the SEC’s call for comments on Fidelity’s filing. Seyffart noted, “Nothing in the filings signal to me that anything has changed. Silence from the agency isn’t a good thing here,” indicating a perceived lack of progress towards approval.

The SEC has been intensifying its efforts to classify Ethereum, the world’s second-largest cryptocurrency, as a security. The regulators issued a series of subpoenas to U.S. companies, focusing particularly on their interactions with the Ethereum Foundation, a nonprofit organization responsible for overseeing the blockchain’s governance and development. The move raised concerns within the crypto industry, particularly following hopes that the SEC’s recent approval of Bitcoin ETFs would pave the way for Ethereum ETFs by major financial players like BlackRock.

The investigation into the Ethereum Foundation, especially following Ethereum’s transition to a “proof-of-stake” governance model in September 2022, signals the SEC’s ongoing scrutiny of the crypto space. This shift away from the “proof-of-work” model, akin to Bitcoin’s, to a more energy-efficient system involving a network of validators, has provided the SEC with new grounds to explore Ethereum’s classification as a security.

The broader regulatory landscape for the crypto industry has been caught between the SEC’s oversight ambitions and the commodities framework applied by the Commodities and Futures Trading Commission (CFTC) to assets like Bitcoin.

Ethereum’s regulatory status has been a matter of speculation and discussion for years. In 2018, SEC officials suggested that Ethereum might not constitute a security, a stance that appeared to shift under Gensler’s leadership, especially after Ethereum’s adoption of the proof-of-stake model. Gensler’s comments in 2023 implied that proof-of-stake-based cryptocurrencies might fit the definition of investment contracts, hinting at a possible security classification, though without directly naming Ethereum.

SEC Chair Gary Gensler has made it clear that the agency’s decision on bitcoin ETFs is specific to bitcoin and should not be interpreted as a broader acceptance of other cryptocurrency products.

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