5 Things You Need to Know About the SEC's Accelerated Decision Process for Ethereum Spot ETFs

Author: HashKey Global

Overview

Since the approval of the Bitcoin spot ETF at the beginning of the year, traditional financial funds have been continuously flowing into the cryptocurrency field over the past few months. The Bitcoin spot ETF currently holds about 830,000 bitcoins, approximately $52 billion. The market has been looking for new narrative focuses, with Bitcoin halving in April and the Ethereum spot ETF in May. As the key date of May 23 for the Ethereum spot ETF approaches, the outlook seems to have shifted from pessimism to optimism based on comments from well-known figures and market trends. The reason is that on the morning of the 21st, Bloomberg analysts published an article stating that the approval probability of the Ethereum spot ETF has greatly increased to 75%, which then triggered a rapid rise in the crypto market, with Ethereum surging more than 20% in a single day. Here are 5 things you need to know about the Ethereum spot ETF:

1) Key date May 23

The application for the US Ethereum spot ETF was first submitted by VanEck on October 27 last year. The SEC's decision time for ETF applications totals 240 days. There will be three public responses in between, with intervals of 45 days, 45 days, 90 days, and 60 days respectively. Before the SEC's final decision (approval or rejection), the SEC has three opportunities to delay the ETF application. The SEC also has the authority to approve or reject the application at any time during the decision process. Based on the previous process of the SEC approving the Bitcoin spot ETF, a decision will be made at the last deadline of the first application, so the final time is May 23 this year.

Source: Bloomberg Intelligence

2) Is Ethereum a commodity or a security?

The US SEC has never made a clear stance on whether Ethereum is a commodity or a security, so the market believes this is the key to whether the Ethereum spot ETF can be approved. Here are the positions of different US regulatory agencies on Ethereum.

In March 2023, Rostin Behnam, Chairman of the US Commodity Futures Trading Commission (CFTC), stated in a report to the Federal Senate Agriculture Committee that Ethereum is the second-largest cryptocurrency after Bitcoin and is considered a commodity. According to the "Howey Test" standard under US securities law, if a cryptocurrency is defined as a security, it is governed by the SEC. Before complete legislation by Congress, the CFTC is trying to firmly establish its position, hoping to win regulatory authority over Bitcoin and Ethereum.

In August 2023, a judge in the Southern District of New York ruled in a cryptocurrency class action lawsuit that Ethereum is a commodity rather than a security. The ruling did not analyze whether Ethereum is a commodity or a security, but simply concluded.

In September 2023, after Ethereum completed its merge, SEC Chairman Gary Gensler mentioned that projects and intermediaries allowing staking tokens might need to pass the "Howey Test" to determine if they are securities, which deepened market concerns that Ethereum might be regulated as a security after transitioning to PoS. Since then, Gensler has been asked multiple times whether Ethereum is a security, but he has not given a clear response.

3) SEC's approval attitude

Compared to the attitude at the beginning of the year when approving the Bitcoin spot ETF, the SEC has not shown a positive attitude towards the application for the Ethereum spot ETF. Based on the SEC's postponement of Franklin and Grayscale's Ethereum spot ETF applications on April 23, many analysts have stated that there has been no constructive dialogue between the SEC and ETF applicants, so the probability of approval on May 23 is very low.

However, on May 20, things took a turn. According to Bloomberg ETF analyst Eric Balchunas and Fox Business reporter Eleanor Terrett, the SEC is asking applicants to expedite the submission of the 19b-4 documents for the Ethereum spot ETF. The sudden start of the application process led the market to believe that the SEC's positive attitude is a precursor to approval.

4) Approval mechanism

Speaking of approval precursors, we need to understand the entire process mechanism first. The first step is that the 19B-4 application document (exchange rule change) must meet the SEC's guidelines. The second step is that the S-1 application document (registration statement) must meet the SEC's guidelines, and the S-1 document may take several weeks or longer to approve. The final step is a vote by the five SEC commissioners. Based on the Bitcoin spot ETF situation, two of the commissioners are friendly towards cryptocurrencies and voted in favor, two voted against, and the final vote was cast by the SEC Chairman, who voted in favor, allowing the Bitcoin spot ETF to be approved. Currently, the Ethereum spot ETF is in the first step, and the subsequent situation is still uncertain. Investors should be aware of market risks.

5) Legal battle

The market has always predicted that if the SEC rejects the application for the Ethereum spot ETF, it may face legal action from the applicants. The reason is that in August last year, Grayscale won a legal battle against the SEC. The key to the victory was Grayscale's protest that the SEC approved Bitcoin futures ETFs but did not have sufficient reasons to continue rejecting the conversion of GBTC to a Bitcoin spot ETF. Ultimately, the judge ruled that the SEC's reasons for rejection were arbitrary and capricious because the SEC failed to explain the different treatment of similar products. Therefore, the market believes that Grayscale's legal victory provides a basis for future cases. If the Ethereum spot ETF is rejected again, issuers can refer to this case to file a lawsuit, and the SEC still faces a high risk of losing.

*In October 2023, the SEC approved 9 Ethereum futures ETFs for trading in the US market.

Conclusion

With two days left until the 23rd, the SEC's attitude has shifted from negative to positive, and the crypto market has gained confidence, with Ethereum rising 20% in a single day. However, from an objective perspective, there are still subsequent procedures such as the S-1 document and commissioner voting, and nothing is certain yet. Investors should be aware of market risks.

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5 things you should know in the US ETH Spot ETF:

1) Key date May 23
2) ETH is commodity or security?
3) What is the stand of SEC?
4) Workflow of SEC approval
5) Lawsuit is the way

Getting closer to the key date of Ethereum spot ETF on May 23, according to the news and market conditions, the chances of approval seems to have turned from pessimism to optimism.

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