Fund managers predict SEC rejection of Ethereum ETFs next week

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In contrast to the enthusiasm that preceded the approval of spot Bitcoin ETFs, reports over the past few weeks suggest that optimistic expectations for the Ethereum product’s approval have cooled down. Speaking with Bloomberg this week, Katherine Dowling, general counsel for ETF applicant Bitwise, said she anticipates rejection next week due to the lack of public activity typically seen before approval.

“Most people are universally expecting a disapproval order,” Dowling noted. “You’re not seeing the types of public activities that you would see if there was going to be an approval.”

In a CNBC interview, VanEck CEO Jan van Eck also predicted a likely denial. Next week, the SEC’s decision will confirm the fate of VanEck’s and Ark Invest’s filings.

“We were the first to file as well for Ethereum in the US, and we and Cathy Wood, are kind of the first in line for May, I guess, to probably be rejected,” he stated.

Unlike the frequent revisions made to spot Bitcoin ETF applications, there has been minimal back-and-forth between fund companies and the SEC regarding Ether ETFs. People involved in the talks with the securities agency reported that they had braced for a negative outcome.

In the final month leading up to the spot Bitcoin ETF decision, the market buzzed with activity. Fund managers engaged in fierce fee competition, while industry experts placed bullish bets.

Bloomberg ETF analysts James Seyffart and Eric Balchunas have pegged the approval chances for spot Ethereum ETFs at a mere 25%. Seyffart recently expressed skepticism about a positive outcome, saying a nod is “not happening.”

Why might the SEC decide to reject spot Ethereum ETFs?

SEC Chair Gary Gensler has not been vocal about Ethereum ETF filings. However, he has clarified that the approval of spot Bitcoin ETFs does not set a precedent for other crypto ETFs. Concerns about the classification of most cryptos as securities remain a major obstacle to compliance.

According to Scott Johnsson, Van Buren Capital’s general partner, the SEC must provide a clear and detailed explanation if they reject spot Ethereum ETF filings. One potential reason for rejection could be Ethereum’s classification.

The obvious purpose is to potentially deny on the basis that these spot filings are improperly filed as commodity-based trust shares and do not qualify if they are holding a security.

— Scott Johnsson (@SGJohnsson) May 14, 2024

The SEC has not definitively classified Ether, and its decision might hinge on whether it considers Ether a security. If the SEC views Ether as a security, then spot ETFs wouldn’t be allowed under current regulations.

The SEC’s alleged investigations into the Ethereum Foundation and the implications of Ethereum’s staking feature suggest a possible regulatory direction.

The SEC might not approve all spot Ethereum ETF applications at once: Coinbase

Despite the uncertainty, Coinbase’s analyst David Han sees a 30% to 40% chance of approval by month’s end.

He believes the correlation between CME futures and spot exchange rates, which was pivotal for Bitcoin ETF approvals, could similarly benefit Ethereum ETFs.

However, like Johnsson, Han noted that the SEC might focus on Ethereum’s PoS mechanism as a reason for denial since regulations around staking are unclear. He suggested spot Ethereum ETFs enabling staking are unlikely to be approved.

ARK Invest and 21Shares recently amended their S-1 form for the proposed spot Ethereum exchange-traded fund (ETF) by removing the staking component. The move is considered an effort to align the filing with SEC preferences.