The discussion surrounding whether Ether is considered a security has become the focal point of the cryptocurrency ecosystem, as the United States Securities and Exchange Commission (SEC) approaches its deadline for deciding on the approval of a spot Ether exchange-traded fund (ETF). The SEC’s final deadline to make a decision on VanEck’s spot Ether ETF application is May 23.
Ether, the second-largest cryptocurrency after Bitcoin, is reaching a critical milestone, and the SEC’s classification of Ether as either a commodity or a security will heavily impact its future. The SEC has already approved spot Bitcoin ETFs, solidifying Bitcoin’s status as a commodity in the eyes of regulators. However, the fate of an Ether ETF is uncertain, as the SEC questions whether Ether is a security, leading many analysts to be less optimistic about the ETF’s approval chances. Bloomberg ETF analyst Eric Balchunas, who previously gave the approval of a spot Ether ETF a 70% chance, now estimates the odds at a pessimistic 25%.
The main obstacle to the approval of spot Ether ETFs is an ongoing investigation by the head of the SEC’s Division of Enforcement, Gurbir Grewal, into Ether’s status as a security. In March, the SEC established a five-member commission to investigate “Ethereum 2.0.” Consensys, a blockchain and Web3 software company, has even filed a lawsuit against the SEC, challenging its authority to regulate Ether as a security.
When it comes to conflicts of interest between regulatory bodies, such as the SEC and the Commodity Futures Trading Commission (CFTC), legal expert Jamie Wright believes the SEC may prevail due to its comprehensive approach to investor protection. SEC Chair Gary Gensler, who recently voted in favor of approving spot Bitcoin ETFs, has expressed his belief that Ether is a security, which could sway the decision against approving a spot Ether ETF.
Scott Johnsson, a finance lawyer, noted that the SEC’s inclusion of a “notice of the grounds for disapproval” in its decision suggests that the SEC is considering the security question for Ether in the upcoming spot ETF order. This clause was not present in the decision on Bitcoin ETFs. Johnsson believes that the SEC may deny the spot Ether ETF filings on the grounds that they are improperly filed as commodity-based trust shares and do not qualify if they are holding a security.
Adam Berker, senior legal counsel at Mercuryo, a global payments platform, stated that the SEC and Gensler have consistently treated all digital tokens, except Bitcoin, as securities. The SEC singled out Bitcoin due to its lack of a central authority, making it more challenging for regulators to approach.
Another factor that could complicate the approval of an ETH ETF is the ability for ETH holders to earn staking rewards. The SEC considers a financial instrument a security if there is an expectation of profit from a passive investment of money based on the work of others in a common financial enterprise. Ether’s early stage pre-mining, initial coin offering, and the presence of a centralized organization, the Ethereum Foundation, make it appear more like a security. Additionally, the PoS protocol used by Ethereum allows validators to earn rewards based on the amount of ETH they stake, further raising concerns about its classification as a security.
In anticipation of potential difficulties with staking, five ETF applicants recently submitted amended filings that remove language regarding staking. This move aims to provide clarity that the Fund’s ETH cannot be staked by anyone.
Many experts believe that the upcoming U.S. presidential election could have a significant impact on the approval of spot Ether ETFs. The election season has highlighted cryptocurrency as an important issue, particularly with former President Donald Trump’s support for crypto assets and recent votes to overturn SEC regulations. A change in government could lead to a new era for cryptocurrency and regulations, driven by growing institutional demand. However, experts caution that Trump’s advocacy may not carry the same weight after the elections.
Some members of the crypto community view SEC Chair Gary Gensler’s appointment as a positive development for crypto, given his background and understanding of the space. However, since taking office, Gensler has taken a firm stance against the industry. A new administration may bring changes in policy priorities and regulatory approaches, influencing how the SEC and other regulators view Ether. Shifting regulatory positions and the overall political climate could lead to a reevaluation of current stances, making the regulatory environment for cryptocurrencies more dynamic and subject to change.