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The journey toward approving Ethereum (ETH) exchange-traded funds (ETFs) faces considerable hurdles despite its promise for the crypto market.
The US Securities and Exchange Commission (SEC) has shown a cautious approach, mirroring Bitcoin ETFs’ pathway before their eventual approval. Bundeep Singh Rangar, Founder and CEO of Fineqia, in an interview with BeInCrypto, highlighted the significant implications and challenges associated with Ethereum ETFs.
The Market Impact of an Ethereum ETF Approval
The approval of Ethereum ETFs is expected to mirror the impact of Bitcoin ETFs, enhancing accessibility and legitimacy.
“The introduction of Ethereum ETFs would enhance accessibility and legitimacy, attracting new investors seeking exposure to Ethereum without direct ownership,” Rangar noted.
This could drive Ethereum’s price appreciation through increased demand and institutional participation. Moreover, Ethereum ETFs could boost adoption among traditional investors and integrate cryptocurrencies into mainstream portfolios, fostering broader market acceptance.
Read more: Ethereum ETF Explained: What It Is and How It Works
However, the SEC’s cautious approach reflects the regulatory challenges in the crypto market.
Recently, the SEC delayed BlackRock’s application for an Ethereum ETF, seeking public input on concerns about fraud and manipulation. The regulatory agency has also questioned Ethereum’s classification following the transition to a Proof-of-Stake (PoS) consensus mechanism, which it argues could meet the Howey Test criteria for security.
“This approach reflects the SEC’s commitment to investor protection and market integrity, highlighting the need for robust safeguards against risks inherent in cryptocurrency markets,” Rangar remarked.
Critical factors influencing the SEC’s decision include addressing market manipulation, fraud, and investor protection concerns. The SEC’s deliberation signals a maturing regulatory environment for cryptocurrencies, balancing innovation with prudent oversight to mitigate potential risks.
The Likelihood of Such an Approval Seems Slim
The successful launch of Bitcoin ETFs sets a positive precedent, yet ongoing concerns about market integrity remain a significant hurdle. Given Ethereum’s distinct characteristics, such as its consensus mechanism allowing for staking rewards, additional challenges must be addressed before receiving the SEC’s approval.
“The likelihood of approval hinges on demonstrating effective measures to mitigate these risks while showcasing market maturity and transparency,” Rangar explained.
Still, market participants do not anticipate the approval of Ethereum ETFs in May. For instance, Bloomberg senior ETF analyst Eric Balchunas believes there is only a 25% chance that the SEC will approve this new financial product. Meanwhile, a wager on the decentralized betting platform Polymarket stands at just 9%.
These projections reflect the important considerations of Ethereum’s potential classification as a security. They further question many other digital assets utilizing PoS as their consensus mechanism.
Interestingly, a Consensys spokesperson told BeInCrypto PoS does not affect Ethereum’s operations or non-security classification.
“If you look at director Hinman’s speech in 2018 when he said that Ethereum was not a security, he didn’t base that on PoW or PoS. The consensus mechanism is irrelevant,” the Consensys spokesperson said.
Read more: Proof of Work and Proof of Stake Explained
While Bitcoin’s consensus mechanism is nearly unique, the approval of spot Ethereum ETFs could pave the way for numerous other cryptocurrencies to be utilized as underlying assets in new financial products. Still, it is the SEC who will have the last word on this matter.