SEC Stunner: Ether ETFs Are A Go

The Securities and Exchange Commission gave three major financial markets permission to list exchange-traded funds based on the spot price of ether in an announcement late Thursday that will create an investor-friendly way to own the second-largest cryptocurrency.

The announcement comes as a surprise to the industry, which was anticipating a rejection from the regulator due to statements from SEC Chairman Gary Gensler suggesting a belief that ether was a security, which would have made the current crop of applications invalid.

The decision clears the way for eight funds to begin trading. The regulator will still need to approve registration documents from Blackrock, Fidelity, and Grayscale applicants. There is no firm timetable governing when these approvals will be provided.

Once these funds begin trading, they will join 11 ETFs based on bitcoin that were approved in January and currently hold about $58 billion of assets. Together, the two sets of funds will give stock-market access to tokens that account for about two-thirds of the $2.68 trillion cryptocurrency market. Although only a minuscule fraction of the more than 14,000 digital coins that exist, according to CoinGecko.

Ether is up 22% since Monday as speculation grew that the funds would be approved. It was little changed at $3,762 since the SEC announcement, which came at around 5:15 p.m. in New York.

“The SEC's approval of Ethereum Ethereum spot ETFs is a huge win for investors everywhere,” Greg Mortiz, chief operating officer of crypto hedge fund Alt Tab Capital, said in an emailed comment to Forbes. “There is massive demand for digital assets and for too long access to them has been restricted to either the technically savvy or the already wealthy. We see the largest financial institutions in the world creating products to meet that demand, and now we see a regulatory decision that embraces progress.

“Perhaps the more interesting question the ETF approval poses, is that if it is possible for ETH, what other altcoins is it possible for?”

When these funds begin trading, investors should not anticipate the same type of record-setting adoption received by bitcoin ETFs. Ten of those received a boost from outflows out of Grayscale Bitcoin Bitcoin Trust, which had previously operated as a closed-end fund with assets of $26 billion and also from futures-based ETFs that held more than $2 billion of the currency.

While the Grayscale Ethereum Trust has $11.1 billion of assets, many of which could depart unless it reduces its heavy 2.5% expense ratio, the handful of ether futures funds have only about $155 million under management. Additionally, ether could be a more difficult sell to new investors than the more familiar bitcoin.

In fact, for as much as the community is celebrating this regulatory victory, at least one applicant would have preferred the approval to come next winter.

“I think TradFi is still digesting bitcoin and if you give TradFi time to get comfortable with bitcoin and crypto, they will be ready for the next thing,” said Bitwise CIO Matt Hougan in comments to Forbesin March. “If you shove it [ether ETFs] down their throat in May, I'm not sure they will be. Part of me hopes that it's December or something like that because that would be better for the market.”

This apparent change of heart by the SEC comes amid broadening pro-crypto momentum in Washington. President Joe Biden and many Democrats in Congress have been wary of allowing cryptocurrencies to get into the hands of individual investors, but on Wednesday, the House of Representatives passed the Financial Innovation and Technology for the 21st Century Act, which for the first time determines how digital assets will be regulated. If enacted, the bill would split oversight duties between the SEC and the Commodities Futures Trading Commission, depending on whether a cryptocurrency is considered a security or a commodity.

The SEC has been adamant that most tokens are securities under existing law, excepting only bitcoin and leaving the door open for ether. The House bill still has to make it past a Democrat-controlled Senate and a reluctant Biden, but the ether ETF approvals are a sign that deep-seated opposition to crypto is softening.

Additionally, both chambers of Congress passed a bill to repeal the SEC’s Staff Accounting Bulletin 121, issued in 2022, that essentially prevents banks from holding crypto in custody. This is the first crypto-focused bill to ever be approved by both houses. Biden has promised to veto the bill, but industry insiders are hoping that his position will change.

The decision on Thursday gives NYSE Arca permission for Grayscale Ethereum Trust and Bitwise Ethereum ETF; Nasdaq for iShares Ethereum Trust; and Cboe BZX Exchange for VanEck Ethereum Trust, ARK 21Shares Ethereum ETF, Invesco Galaxy Ethereum ETF, Fidelity Ethereum Fund and Franklin Ethereum ETF.