Three reasons why the SEC might not greenlight Ethereum ETFs

Despite approving Bitcoin spot exchange-traded funds in January, the US Securities and Exchange Commission may deny similar products for Ethereum, the second-largest cryptocurrency by value.

The agency has yet to meaningfully engage with prospective Ethereum spot ETF issuers, Bloomberg analysts have noted, and with a crucial deadline looming in two and a half months, the lack of communication isn’t a good sign.

Why the SEC may deny

There are three main reasons why the SEC may deny spot Ethereum ETFs.

The first is that Ethereum’s regulatory status isn’t clearly defined. While SEC chair Gary Gensler has repeatedly stated that Bitcoin is a commodity and should be regulated as such, he has made great efforts to remain vague about Ethereum.

Muddying the waters is that the SEC approved Ethereum futures ETFs in October. That means the regulator “implicitly [classified] Ethereum as a non-security commodity,” according to ETF Institute co-founder Nate Geraci.

The second reason has to do with political blowback. The SEC was heavily criticised by Senator Elizabeth Warren, a Democrat from Massachusetts, for greenlighting Bitcoin spot ETFs — even though it approved these ETFs only after a court loss.

“The SEC is wrong on the law and wrong on the policy with respect to the Bitcoin ETF decision,” Warren posted on X in January, before adding that the agency was letting “crypto burrow even deeper into our financial system.”

“Gary is in the Warren doghouse” for issuing the Bitcoin spot ETFs, Bloomberg Intelligence ETF analyst Eric Balchunas said on X on Sunday. “It may be that simple.”

The third reason is that the SEC may believe it’s less exposed to the threat of lawsuits. Grayscale Investments sued the agency after it denied its application to convert its Bitcoin Trust into an ETF, but may be less inclined to do so this time around.

“Grayscale may be less excited to subsidise another blockbuster hit product for BlackRock,” Balchunas said, referring to the overwhelming success of BlackRock’s spot Bitcoin ETF, which was launched in January at the same time as Grayscale secured the right to convert its Bitcoin Trust to an ETF.

Alternatively, the SEC “could come up with new grounds for denial that weren’t tested by Grayscale in court, which would likely also be subject to a court challenge but may be easier for the SEC to justify,” Jake Chervinsky, chief legal officer at venture-capital firm Variant, wrote on Monday.

The agency could also be “willing to take litigation risk and lose in court based on a preference for being viewed as ‘fighters’ in a war against crypto rather than being accused of rolling over,” Chervinsky said.

Should it decide to approve the Ethereum spot ETFs, the SEC is likely to proceed as it did with Bitcoin ETFs and greenlight all of them at once to avoid giving an unfair advantage to a particular fund. That brings the final deadline for a decision to May 23.

Balchunas revised on Monday the odds of an Ethereum spot ETF approval to 35% — down from 70% in February.

Crypto market movers

• Bitcoin is down 1.6% in the last 24 hours, trading at $71,342.
• Ethereum slumped 1.5% in the same period, priced at $3,962.

What we’re reading

• Thailand green-lights Bitcoin ETFs as global regulators ease resistance to listed crypto funds — DL News
• VanEck Drops Bitcoin ETF Fees To Zero Until 2025 — Milk Road
• How, in 7 Weeks, Bitcoin ETFs Reached Inflows That Took Gold ETFs 3 Years — Unchained
• EU Parliament Approves Stricter Rules To Combat Sanctions Including Crypto — Milk Road
• Binance financial crime head held in a ‘guest house’ in Nigeria for two weeks — DL News

Tom Carreras is a markets correspondent at DL News. Got a tip about Ethereum ETFs? Reach out at tcarreras@dlnews.com