SEC may let Ethereum spot ETFs happen, but not with staked ETH: Galaxy Digital Head of Research

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The US Securities and Exchange Commission (SEC) may greenlight spot Ethereum exchange-traded funds (ETFs) that do not include the staking feature, suggests Alex Thorn, Head of Research at Galaxy Digital. He believes the SEC would distinguish Ethereum (ETH) and staked ETH in the approval process. 

“If the speculation about a 180 from SEC on the Ethereum ETFs is true, I would guess they try to thread a needle between “ETH” NOT being a security and “staked ETH” (or even more flimsily, “staking as a service ETH”) as BEING a security,” he stated.

According to Thorn, by setting clear boundaries between ETH and staked ETH, the SEC could approve spot Ethereum ETFs without contradicting its past actions, including the alleged investigation into the Ethereum Foundation and entities associated with Ethereum, like Consensys.

“In this case and perhaps for other reasons, you would expect [the] SEC to prohibit the ETFs from staking the ETH they hold,” he added.

Recent comments from Bloomberg ETF analysts James Seyffart and Eric Balchunas have fueled the conversation around the SEC’s potential shift in stance.

The two analysts said on Monday that the odds for a spot Ethereum ETF approval had increased to 75%. Balchunas noted that the key factor appears to be a “political issue.”

Commenting on a post by Scott Johnsson, Van Buren Capital’s general partner, regarding the matter, Bloomberg ETF analyst James Seyffart suggested that the removal of staking could be the deciding factor.

The SEC’s decision on VanEck’s spot Ethereum ETF is expected by May 23, and the ARK21 Shares Ethereum ETF’s deadline follows on May 24.

Middle ground

Apart from the latest development, exchanges seeking to list and trade shares of spot Ethereum ETFs have reportedly been asked to revise their 19b-4 filings. This suggests another scenario: the SEC may approve 19b-4s for spot Ethereum ETF but delay S-1 applications.

For an ETF to be approved and begin trading, the issuer needs the SEC to approve two applications: a 19b-4 application, which grants regulatory approval for its listing, and an S-1 application, which lets the ETFs launch and operate fully.

In short, while a 19b-4 might be technically approved without an S-1, the ETF would not be operable without an S-1’s approval. In the case of the Bitcoin ETF, both applications were approved around the same time, allowing trading to commence just a few days later.

The SEC may want to avoid backlash from the crypto community, but it may not be comfortable allowing spot Ethereum ETFs on the market just yet.

To achieve this middle ground, the SEC may consider approving the 19b-4 for the general product but delaying the approval of any specific S-1 applications from issuers. This approach would let the agency effectively stall the launch of specific Ethereum ETFs until further scrutiny.

The SEC’s consideration of spot Ethereum ETFs will occur amid intensifying regulatory scrutiny of crypto in the US.

Crypto has increasingly become a political flashpoint between the two parties that dominate American politics. There have been signs that Democrats are leaning more toward tightening enforcement, though not all Democrats are against crypto. Last Thursday, 21 Democrats joined Republicans in voting for a resolution to overturn the SEC’s Staff Accounting Bulletin No. 121 (SAB 121).

Under the leadership of the Biden administration, the US has been known for its regulatory crackdown on the industry. The US SEC makes itself an example of this skeptical approach. The federal agency’s legal actions against crypto entities have been an ongoing topic of discussion over the past few years.