Crypto’s Washington win streak continues as ether ETF debut nears. Here’s what it means

By Chris Matthews, Frances Yue

Ether has surged 28% over the past seven days in anticipation of a spot ETF approval

U.S. regulators took a major step forward Thursday toward green-lighting a spot ether exchange-traded product that could potentially lead to mainstream adoption of the world’s second-most-popular cryptocurrency.

The Securities and Exchange Commission approved filings from the New York Stock Exchange, Nasdaq and a subsidiary exchange of Cboe requesting a rule changes that would enable it to list a spot ether (ETHUSD) ETFs.

The SEC approved the 19b-4 filing, but still must approve a registration statement from VanEck before the product can be sold to investors.

Nate Geraci, and investment advisor and president of the ETF Store, told MarketWatch that he believes the SEC will ultimately approve the registration statements, but that the agency will “slow play” the process.

Analysts say that the SEC could approve the registration statements in as soon as two weeks, but that it will likely take at least a month or two to finish the job.

It’s notable that during the ether-ETF approval process, the SEC’s stance took an 180-degree turn in a short period of time.

See also: The crypto Congress: Momentum builds for ‘most significant’ digital-asset law in history

For months, crypto industry participants were pessimistic about an approval in May, due to a lack of engagement from the SEC.

However, on Monday, the agency told major exchange operators Nasdaq, Cboe and the New York Stock Exchange to amend their applications to list spot ether ETFs, signaling that the regulator may be leaning toward approving such products.

The change suggests that the political environment is becoming more friendly to the crypto industry as the U.S. election approaches, according to Quinn Thompson, founder and chief investment officer at digital-asset hedge fund Lekker Capital.

On Wednesday, the House of Representatives passed landmark crypto legislation, called FIT-21, which would create a targeted disclosure and registration regime for digital-asset companies, and grant primary responsibility for regulating the industry to the Commodity Futures Trading Commission instead of the SEC.

The law was passed with 71 Democratic votes, more than industry sources had expected to start the week, and with nearly unanimous support from Republicans.

The Biden administration’s statement on the law also buoyed hopes that Democratic regulators would take a more conciliatory approach to the industry going forward.

While opposing the FIT-21 law, the Biden administration said that it looked forward to working with Congress to create custom crypto regulations that “includes adequate guardrails for consumers and investors while creating the conditions needed for innovation.”

Meanwhile, optimism on the ether ETF approval has sent the crypto’s price up about 28% over the past seven days, according to FactSet. However, whether the gains can be sustained depends on meaningful inflows to the ether products, Thompson said.

Read more: Crypto bulls may have gone ‘too far’ on ether ETF approval optimism

Geraci of the ETF Store said that potential demand for ether could be strong, though not in comparison to recently approved spot bitcoin ETFs.

“The underlying spot ether market is approximately one-third the size of bitcoin. I think it’s reasonable to expect something similar with spot ether ETFs – that demand will be roughly one-third of spot bitcoin ETFs,” he said.

Earlier this week, several would-be ether ETF issuers amended their filings at the request of the SEC to remove the plans for staking the ether they’d purchase for the fund.

Staking refers to a process in proof-of-stake blockchains where investors lock up their cryptocurrency to validate transactions and earn rewards.

The absence of the staking option with ether ETFs may weigh on such products’ demand, as staking ether generates an additional yield, said Peter Eberle, president and chief investment officer at Castle Funds. Staking ether currently offers a return of about 3.5% annually, according to the Ethereum foundation.

“If someone is a long-term holder that makes a big difference,” Eberle said. “With the BTC ETF there is no such disadvantage.”

Bitcoin (BTCUSD) operates with a different consensus mechanism called proof-of-work, where the blockchain is secured by miners solving complicated mathematical problems.

Eberle said he also doesn’t think there would be much institutional demand for ether ETFs. As ether and bitcoin prices remain highly correlated, institutions would not have much incentives to allocate to ether ETF, if they are already invested in the bitcoin ones, Eberle said.

The lack of the staking option with ether ETFs may also lead to arbitrage trading where traders may stake their ether while shorting the ETFs, noted Matt Ballensweig, head of Go Network at BitGo.

-Chris Matthews -Frances Yue

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-23-24 1724ET