Rumors Hint at SEC Changing Course on Spot Ether ETFs

Speculation suggests the SEC may soon approve spot Ether ETFs. Analysts James Seyffart and Eric Balchunas even increased the odds of approval from 25% to 75%. The SEC is expected to decide on VanEck’s spot Ether ETF by May 23. This has raised hopes in the crypto market, with some in the industry speculating that the potential approval could end the "crypto winter." However, the soft launch of Prometheum's controversial ETH custody service, which treats Ether as a security, might complicate things.

SEC Might Approve Spot Ether ETFs

Two Bloomberg exchange-traded fund (ETF) analysts, James Seyffart and Eric Balchunas, recently completely shifted their expectations regarding the United States Securities and Exchange Commission (SEC) approving a spot Ether (ETH) ETF. Not too long ago, they predicted a very low 25% chance of approval.

Their predictions were based on previous filings, public statements from SEC Chair Gary Gensler, and ongoing investigations that suggested a likely denial. However, after “hearing chatter” about a potential change in the SEC's stance, they have now increased the odds of approval to 75%

Seyffart is not looking forward to the potential backlash if their revised prediction proves to be accurate, but they have heard from multiple sources that the ETH ETF will likely be approved.

The SEC is set to make a decision on VanEck’s spot Ether ETF by May 23. This makes VanEck’s application the first in a series of spot Ether ETFs under consideration, with other firms like ARK 21Shares, Hashdex, Invesco Galaxy, BlackRock, and Fidelity also eagerly awaiting the regulator’s decisions.

In a recent interview, VanEck CEO Jan van Eck shared that he was very doubtful about the SEC approving their ETF application in May. This skepticism was reinforced when Grayscale withdrew its application for an Ether futures ETF on May 7.

Crypto Bulls Rally on Ether ETF Approval Hopes

Crypto bulls are also gaining some momentum because of the speculation that the approval of a spot Ether ETF is increasingly likely. The SEC even asked ETF exchanges to update their 19b-4 filings. As a result, ETH’s price surged by about 19.9% over the last 24 hours of trading to $3,720, its highest price since Apr. 9.

In addition to Balchunas and Seyffart, others in the industry are also very optimistic about ETH ETF approvals. Henrik Andersson, chief investment officer at Apollo Crypto, believes that approval now seems more likely due to political movements in Washington, especially around SAB 121. This indicates that crypto-owning Americans could become a major voter demographic in the upcoming election.

Adam Cochran, partner at venture capital firm Cinneamhain Ventures, also shared his optimism on social media. He suggested that this could signal the end of the crypto winter and the beginning of a renaissance for U.S. crypto.

Ryan Sean Adams, host of the Ethereum podcast Bankless, agrees with this and stated that a political shift could mark the end of "operation choke point 2.0," which has been riddled by SEC lawsuits. Galaxy Digital founder and CEO Mike Novogratz is also very confident in the cryptocurrency industry's future and its potential for institutional adoption over the next 12 to 24 months.

As the U.S. election approaches, digital assets have become a key issue. Even Donald Trump is actively looking for support from the crypto community. He also ended up hosting a dinner with nonfungible token enthusiasts and pledging to prevent innovators from moving offshore. In fact, a poll conducted by Digital Currency Group found that a candidate's stance on crypto could influence voters in several swing states.

Prometheum Soft-Launches Controversial Ether Custody Service

On the other hand, Prometheum soft-launched its very controversial ETH custody service that treats digital assets as securities. According to a May 20 report from Fortune, this custody solution was made available to a few select companies on May 17, with a full-scale launch expected in June.

Prometheum’s services target asset management firms, hedge funds, banks, and registered investment advisors, and it plans to expand to retail clients later in 2024. The company turned a lot of heads in June last year when co-founder and co-CEO Aaron Kaplan testified before a United States House Committee, supporting crypto regulation under current securities laws, which is a view shared by the SEC.

In February, Prometheum announced it would treat Ether as a security for its custodial services. Naturally, this move was heavily criticized by the crypto community. Kaplan explained that this approach addresses concerns that existing laws can't cover digital assets, marking the first instance of an investment contract digital asset security being custodied and regulated under securities laws. This development initially added to the speculation that the SEC will not approve spot Ether ETFs.

Prometheum was founded by brothers Aaron and Benjamin Kaplan in 2017, but only really started to gain more traction after securing a broker-dealer license from the SEC and the Financial Industry Regulatory Authority in June of 2023.

However, the launch of Prometheum's Ethereum custody service may lead to some more tension between the SEC and the U.S. Commodity Futures Trading Commission (CFTC). The CFTC, which has long classified Ether as a commodity, warned in March that this product could conflict with U.S. financial market rules. CFTC Chair Rostin Behnam is concerned that this situation could result in exchanges listing Ether as a futures contract being non-compliant with SEC rules.

Staked Ether Security Concerns

Alex Thorn, head of research at Galaxy Research, is still worried about the SEC potentially classifying staked Ether as a security. Thorn suggested that the SEC might differentiate between "ETH" not being a security and "staked ETH" or "staking as a service ETH" being considered securities.

He believes this could align with previous court cases and ongoing investigations which will then allow the SEC to approve Ethereum ETFs while still maintaining their earlier positions.

Additionally, another community member raised concerns about the potential liquidity issues with staking Ether in an ETF. This might also complicate regulatory compliance. Thorn addressed this by comparing it to limits on lending ETF collateral and mentioned that European exchange-traded products (ETPs) offer staking services.

Historically, the SEC has shown a tendency to classify Ether as a security, and it seems like the regulator has not changed its mind at all. Eleanor Terret recently pointed out documents that were filed by Consensys on Apr. 29, suggesting that the SEC and Chair Gary Gensler have believed for at least a year that Ether was an unregistered security.

What is a Security?

According to U.S. law, securities are "investment contracts" where an investor expects to make a profit primarily from the efforts of a promoter or a third party. Profits can be generated through the sale of the security or by collecting dividends or interest payments.

To determine whether a transaction qualifies as an investment contract and thus a security, the SEC often uses the Howey Test, which originated from a 1946 U.S. Supreme Court case involving citrus groves.

The Howey Test defines a security as an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. This test has been pivotal in several enforcement cases involving cryptocurrencies, including Ripple's XRP token. The interpretation and application of the Howey Test are crucial in the regulation of cryptocurrencies, as it influences whether they are treated as securities, subjecting them to specific legal and regulatory requirements.

If a cryptocurrency is classified as a security, it has major implications for both the issuer and investors. The issuer and exchanges have to obtain the necessary licenses from securities regulators, a process that can be quite complicated and time-consuming.