Forbes: Is Bitcoin’s surge a boon or a trap for Ethereum ETFs?

24-03-05 21:00

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Original title: Why Bitcoin's Surge Could Be A Boon, Or Trap, For New Ether ETFs

Original author: Steven Ehrlich, Forbes staff

Original compilation: Luffy, Foresight News

The spring of the crypto world has arrived early. Bitcoin is trading above $60,000, up more than 167% in the past 12 months. In less than two months since spot Bitcoin exchange-traded funds (ETFs) hit the market, more than $7 billion has already flowed into these new funds. Subsequently, the market is full of expectations for the listing of the spot Ethereum ETF. ETH currently has a market value of more than $400 billion, second only to Bitcoin, which has a market value of more than $1.2 trillion. In May, the U.S. Securities and Exchange Commission (SEC) may make its final ruling on nine spot Ethereum ETF applications. But unlike early January, when the passage of a Bitcoin ETF seemed like a given, the future for Ethereum is far less clear.

The most immediate concern is whether the SEC considers Ethereum to be a security, meaning that it will be traded at the SEC under the Investment Company Act of 1940 Register and be regulated. Most ETFs, like the QQQ or the SPDR S&P 500 Trust, fall under the purview of what is known as the 40 Act because they are a combination of stocks or registered securities. Although cryptocurrency trading and activity may appear to be very similar to securities markets, the crypto-asset community agrees that the thousands of different cryptocurrencies behind the nascent industry worth more than $2 trillion are not securities. In fact, they bristled at the idea that cryptocurrencies are securities, calling it anathema to the decentralized ethos that launched Bitcoin 15 years ago. These beliefs were confirmed to some extent when the SEC approved spot Bitcoin ETFs in January after more than 10 years of waiting under the Securities Exchange Act of 1933, which recognizes the Bitcoin behind these funds is a commodity.

So far, the SEC has avoided discussing whether Ethereum is a security, despite its June 2023 case against Coinbase , claims that many tokens, including those associated with blockchains like Cardano and Solana (essentially clones of Ethereum), are essentially securities. SEC Chairman Gary Gensler has remained silent on the question of whether Ethereum is a security. During a congressional hearing in June 2023, House Financial Services Committee Chairman Patrick McHenry asked Gensler whether Ethereum was a security or a commodity. The most common thing Gensler said at the end of a controversial discussion was "I don't think you want me to prejudge..."

If the SEC determines that Ethereum is a security, it will insist that Ethereum ETF issuers treat it as a security in their approval applications. While this may seem like nothing more than a pile of legal paperwork, doing so would be an insult to crypto industry insiders and idealists and call into question the status of thousands of cryptocurrencies. However, given the potential multi-billion dollar bets on the first mover in the emerging cryptocurrency ETF market, those companies that can quickly gain market share like Bitcoin ETFs such as Blackrock, Invesco, Fidelity and others may benefit from the SEC's ruling.

An applicant who requested anonymity said, "Ultimately, we will file under any jurisdiction or regulation that the SEC wants."

After Bitcoin, Ethereum, created in 2015 by Vitalik Buterin and others, is the second most important blockchain in the world. What differentiates it from Bitcoin is that it allows developers the freedom to create countless applications that run on it, often called smart contracts. Its success is critical to a vast ecosystem of companies like Nike, Circle, Uniswap, and Blur, which have businesses ranging from payments to decentralized finance and gaming to NFT applications. In terms of market performance, Ethereum’s price has increased 1x in the past 12 months.

Ethereum’s origin story is very different from that of Bitcoin, which has attracted intense interest from SEC lawyers. Bitcoin was launched in 2009 after the developer behind the pseudonym Satoshi Nakamoto mined the first so-called block, and then anyone could join the network and become a miner, with no pre-allocation required for the founder. Mine and earn new Bitcoins. In contrast, Ethereum was crowdfunded in the form of an initial coin offering in mid-2014, with the founding team led by Vitalik Buterin retaining some of the 72 million ETH created at launch. In many ways, Ethereum’s ICO is similar to how a company’s founders issue stock in an initial public offering.

One of the determining factors in determining whether something is a security has to do with centralized control. In the early days of Ethereum, this peer-to-peer network was run by a small group of developers. control. However, over time, Ethereum and its governance became increasingly decentralized.

Bill Hinman, who served as the SEC’s corporate finance director in 2018, said: “Leaving aside the financing activities during the creation of Ethereum, based on my experience of Ethereum, Current status, understanding of the Ethereum network and its decentralized structure, the current issuance and sale of Ethereum are not securities transactions."

Another conflicting signal comes from Ethereum futures ETFs launched last fall, such as VanEck’s Ethereum Strategy ETF and ProShares’ Ether Strategy ETF. “If the SEC was going to take the position that Ethereum is a security, one would have expected it when they allowed Ethereum futures funds to launch last year because the ETH futures held by these funds are specifically regulated as a commodity by the CFTC. , not securities futures," said Greg Xethalis, general counsel at crypto venture capital firm Multicoin Capital. On the other hand, New York-based Prometheum is the only broker-dealer registered with Finra and has obtained a special license to custody and trade digital assets. Prometheum plans to launch custody and trading services for Ethereum as a "crypto-asset security" this spring.

Prometheum CEO Aaron Kaplan believes that Ethereum is a security. "If you think about it, Gary Gensler has been saying that almost all cryptocurrencies except Bitcoin are securities."

Potential profits for issuers of the first spot Ethereum ETF could be significant. In October 2021, ProShares launched its first Bitcoin futures ETF, called the ProShares Bitcoin Strategy ETF (BITO), two weeks ahead of its competitors. On its first day of release, it brought in over $1 billion in inflows, and it has dominated cryptocurrency futures ETFs ever since. BITO has $2 billion in assets, charges 0.95% annually, and has 90% market share. GBTC was an early mover in the Bitcoin fund space, and despite its 1.5% expense ratio (more than four times that of its spot Bitcoin ETF competitors), it still maintains market dominance with $26 billion in assets, while Its second largest competitor, BlackRock, is at $9 billion.

If this potential advantage isn't enough, there are additional incentives. Spot commodity ETF applications filed under the Securities Exchange Act of 1933 have a 240-day deadline or approval period for careful consideration by the SEC. These types of filings require the listing exchange (such as Nasdaq or the New York Stock Exchange) to file a separate form called a 19-b4 in addition to the Form S-1 for the new securities offering. Giang Bui, head of U.S. equities and ETPs at Nasdaq, said the filings were reviewed by two different divisions of the SEC and followed different timelines. S-1s are reviewed by the SEC's Division of Corporate Finance and 19-b4s are reviewed by the SEC's Division of Trading and Markets.

If a spot Ethereum ETF application is filed under the 1940 Act, the issuer only needs to file Form N-1a as its registration statement, which is reviewed by the SEC's Investment Management Division. This streamlined approach means that a 40-Bill application takes 60 days instead of 240 days to become effective. On Wall Street, that shortened window of time can make or break an IPO.

For the broader crypto industry, approval of an Ethereum spot ETF under the 1940 Act could wreak havoc on the market, especially in Ethereum. Square spot market. The cryptocurrency’s pricing mechanism may be questioned because many of the key exchanges that determine prices, including Coinbase and Kraken, are not registered or authorized to trade the securities. When Ripple's token XRP was sued by the SEC in December 2020, several exchanges including Coinbase and OKCoin delisted the digital asset. Given Ethereum’s importance, few expect ETH to be delisted from exchanges, but this could hurt market demand. The smooth functioning of deep, orderly markets is a key component of any ETF application. Coinbase is a particularly prominent player in this drama, as it is positioned to provide custody and prime brokerage services for new cryptocurrency ETF products. In fact, the company’s chief legal officer Paul Grewal sent a letter to the SEC in late February imploring it to approve the current Ethereum spot ETF application. Grewal asserted in the letter: "Ethereum is a commodity, not a security."

The SEC needs to make a decision on the current spot Ethereum ETF application With nearly three months until the verdict, it's difficult to tell which view will ultimately prevail. “The challenge we face is that the CFTC said Ethereum is a commodity, and the SEC previously said Ethereum is a commodity, and now under the new administration, It also says that Ethereum can be a security," said Annemarie Tierney, a lawyer at cryptocurrency advisory firm Liquid Advisors. She also noted that the SEC notably excluded Ethereum from its securities violation lawsuits against Coinbase, Kraken, and Binance. "In any enforcement action against the exchange, they have not listed Ethereum as a security, so I don't know what to make of this."

Anyway , don’t expect potential spot Ethereum ETF issuers to be wedded to the ideals of the crypto industry. “The SEC has done inconsistent things in the past,” said one applicant who has launched a spot Bitcoin ETF on the market. "If they say we can only bring a spot Ethereum ETF to market under the 1940 Act, then we will definitely keep that option open."