On May 23, 2024, the Staff of the Securities and Exchange Commission's Division of Trading and Markets (the “SEC”) approved rule changes (so-called “19b-4 forms”) permitting the listing and trading of eight separate exchange-traded funds (“ETFs”) that invest in ether, the main crypto asset supporting the Ethereum blockchain.1 This approval comes just a few months after spot bitcoin ETFs were approved by the SEC and began trading in the United States. However, the approval does not mean these ETFs will be immediately open to investors or traded in the United States.
In this alert, we look at several key questions related to these spot ether ETFs, including when they may start trading and what this means for future crypto-related investment products.
KEY QUESTIONS AND TAKEAWAYS
WHEN WILL INVESTORS BE ABLE TO BUY AND TRADE SPOT ETHER ETFS?
- The SEC approved the ETFs for trading, but the registration statements for each ETF remain under review by the SEC. These registration statements will need to be approved through a separate review process and the timing of that is unclear.
- As part of that process, the registration statements may need to be amended in response to SEC Staff comments. Notably, in the days leading up to the 19b-4 approval, each ETF's registration statement was amended to preclude any staking of ether received or managed by the ETF.
- Staking is a consensus mechanism that provides protection for the Ethereum blockchain against fraudulent transactions; by locking up ether tokens for a period of time, stakers receive a variable yield in exchange for their commitments. The SEC has alleged, in a separate legal proceeding, that facilitating pooled ether staking constitutes an investment contract, and—at least at launch—the spot ether ETFs will not be able to stake any of the assets they purchase on behalf of holders.2
WHAT DOES THIS MEAN FOR ETHER'S STATUS AS A “SECURITY”?
- In the trading approval for spot ether ETFs, the Staff observes that ETF shares are “Commodity Based Trust Shares.” This suggests that spot ether is a commodity and not a security; however, there is no discussion or analysis that would provide context for this. The absence of any commentary is notable given that this issue has been debated for some time.
- It remains to be seen whether the SEC will approve the registration statements relating to these ETFs.
WHAT DOES THIS MEAN FOR OTHER SPOT CRYPTO ETFS IN THE UNITED STATES?
- The SEC Staff's approval related to spot ether ETFs appears narrowly tailored to digital assets having an active futures markets on the CME.3 Bitcoin and ether are the only two such digital assets, and it remains to be seen whether issuers can successfully argue that other cryptocurrencies might have sufficiently secure markets (which has been one of the SEC's central arguments against spot crypto ETFs) without being able to rely on several years of historical trading data from established traditional exchanges, such as the CME.
- SEC Chair Gary Gensler's statement related to the spot bitcoin ETFs preemptively distinguished the spot bitcoin ETF from any other crypto-related product that may come to market in the future. The arguments in this statement may be raised in connection with other, new crypto-linked investment products that sponsors may seek to bring to market.
WIDER ACCESS TO ETHER BY RETAIL AND INSTITUTIONAL INVESTORS, BUT HOW MUCH?
- When investors are finally able to purchase spot ether ETFs, these ETFs will provide a broader array of institutional and retail investors with a means to invest in ether.
- However, in light of the ETFs' inability to stake ether—and as a result, the inability of the funds to earn or distribute staking rewards for ether they hold—it remains to be seen whether the introduction of a second spot digital asset product will garner the same market enthusiasm that the spot bitcoin ETFs received in their first months of trading.
Footnotes
1. The approved funds included the Grayscale Ethereum Trust, the Bitwise Ethereum ETF, the iShares Ethereum Trust, the VanEck Ethereum Trust, the ARK 21Shares Ethereum ETF, the Invesco Galaxy Ethereum ETF, the Fidelity Ethereum Fund, and the Franklin Ethereum ETF.
2. See Opinion and Order, SEC v. Coinbase, Inc., No. 1:23-cv-04738-KPF (S.D.N.Y. Mar. 27, 2024), Dkt. No. 105.
3. This conclusion is also in line with the DC Circuit's reasoning in its decision rejecting the SEC's prior ruling of Grayscale Investment's spot bitcoin exchange-traded product. See Grayscale Investments, LLC v. Securities and Exchange Commission, 82 F.4th 1239, 1251-52 (D.C. Cir. 2023).
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