The US Securities and Exchanges Commission (SEC) recently approved “on an accelerated basis” rule-change proposals from three exchanges looking to list spot Ethereum exchange-traded products. Most observers had expected the SEC to reject the applications on the basis that they were filed as commodity ETFs and the SEC deems Ether (or ETH, the native cryptocurrency of the Ethereum platform) to be a security.
“The approval order leverages research from Bitwise and the SEC examining the correlation between spot Ether prices and the price of regulated Ethereum futures contracts,” says Matt Hougan, chief investment officer at crypto index fund manager Bitwise. “The fact that there is a large, robust and regulated futures market in Ethereum had a big impact on the decision.”
Another factor was removal of staking from the filings. Ethereum relies on staking to ensure the security of the network, rewarding users who participate in block production and validation through a portion of newly created ETH.
Higher staked amounts help secure the network further by making it more immune to 51% attacks. A 51% attack is an attack on a cryptocurrency blockchain by an entity or group that controls more than 50% of the network and thus can prevent new transactions from gaining confirmations and to reverse non-confirmed transactions.
Ethereum moved from a proof-of-work model to proof of stake in 2022, replacing competitive mining with a passive approach to validating transactions to receive rewards.
“By removing staking, the ETFs could operate primary market activity in the same way as spot bitcoin ETFs,” explains Bryan Amour, director of passive strategy research North America at Morningstar. “But the absence of staking reduces the appeal of these funds, as staking Ethereum directly can increase total returns by 2% to 4% per year.”
Staking issues
One market participant suggested that the absence of staking would persuade sophisticated institutional investors to instead focus on scalable benchmarked total return products.
But Katalin Tischhauser, head of investment research at digital asset bank Sygnum, is sanguine about the absence of staking, despite acknowledging that some investors may favour direct investment in ETH to get the staking yield – and that those locked into the Grayscale Ethereum Trust who will now be able to sell may choose to switch into ETH directly.
“As new investors familiarise themselves with Ethereum, they may not immediately be aware of the issues around staking, or they may not care,” she says. “If you expect a 50% upside or more over a six- to 18-month horizon, missing out on 3.4% per annum won’t make much of a difference and you may just prefer the ease and familiarity of the ETF.”
While staking may be a compelling feature for some, it was not the primary focus for market participants seeking Ethereum ETF approval, claims Norman Wooding, chief executive and co-founder of crypto trader, custody and staking provider Scrypt.
“The appeal of trading Ether ETFs lies in their accessibility, convenience and regulatory safety,” he says.
Hougan at Bitwise acknowledges that staking would make Ethereum ETFs more attractive to some investors, but reckons that if the choice is between a non-staking ETF and either no exposure or exposure through a less-familiar platform, many investors will choose the ETF.
“It is worth noting that roughly three quarters of all ETH today is unstaked, meaning most investors have chosen to invest in ETH without staking rewards,” he adds.
Here to stay
Other challenges include a lack of awareness among institutional investors.
“We believe it will take significantly more time and effort to educate this new audience about Ethereum, which is much more than a cryptocurrency and rather an open-source platform to build decentralized applications,” says Laszlo Szabo, chief executive and co-founder of staking platform Kiln.
The price of ETH jumped more than 20% in the week of the SEC announcement. According to Ophelia Snyder, co-founder and president of crypto exchange-traded product issuer 21Shares, the SEC’s decision to approve spot Ethereum ETFs is a sign that cryptocurrency is here to stay and proves that the asset class is compelling.
“Investing in Bitcoin is not necessarily an investment in the crypto asset class, just as buying gold as a store of value does not imply you are ready to enter the commodities market,” says Tischhauser. “However, adding ETH, which has an entirely different value proposition to Bitcoin and an exposure to the broad crypto ecosystem with its multitudes of use cases and applications, means you are looking across the crypto asset universe.”
The SEC’s approval of spot Ethereum ETFs demonstrates a growing acceptance and recognition of cryptocurrencies as legitimate investment assets by regulatory authorities and sets a precedent for future cryptocurrency ETFs, according to Wooding.
