Ethereum ETFs More Uncertain as SEC Seeks to Label Ether a Security

The SEC seems more motivated than ever to officially classify Ether as a security, just as decisions about VanEck and Hashdex’s ETH ETFs are delayed until May.

The SEC has heightened its investigation to classify Ether as a security. This increased scrutiny interestingly coincides with delays in approving spot Ether ETFs, after the SEC's earlier approval of Ether futures ETFs and spot Bitcoin ETFs. The situation has stirred a debate over Ether's regulatory status, which could also implicate the U.S. Commodity Futures Trading Commission (CFTC) due to overlapping jurisdiction issues. Despite regulatory uncertainties, some people in the crypto space still believe that approval for spot Ether ETFs is inevitable.

SEC's Classification Crusade

The United States Securities and Exchange Commission (SEC) has reportedly intensified its scrutiny on the Ethereum Foundation and several U.S.-based companies. According to a recent report from Fortune, the SEC has issued subpoenas to companies looking for documents and financial records related to their interactions with the Ethereum Foundation. This action is part of an investigation that could allow the SEC to classify Ether as a security.

This regulatory push came after Ethereum's transition from a proof-of-work to a proof-of-stake blockchain in 2022, a change that has been closely watched by the SEC. The commission's interest in defining the regulatory status of Ether has been a topic of wide speculation, especially under the tenure of SEC Chair Gary Gensler, who has been on the fence about Ether's classification despite stating in 2018 that Bitcoin, Ether, and other cryptos were not considered securities.

This indecision by the regulator is very evident in the fact that the SEC approved Ether futures ETFs, while the approval for spot ETH ETFs is still pending and being continuously delayed. Could the SEC’s revived interest in classifying Ether as a security have anything to do with the regulator preventing the approval of spot ETH ETFs?

The scrutiny over Ether's status has also led to other developments in the crypto industry. Prometheum, a crypto firm approved as a special purpose broker-dealer for digital asset securities, announced plans to offer institutional custody services for Ether. Many believe this move is an effort to seek clarity and avoid potential regulatory liabilities associated with crypto assets.

It is also worth noting that the SEC's actions could potentially bring it into conflict with another regulatory body, the U.S. Commodity Futures Trading Commission (CFTC), as they are both still trying to define their roles in the digital asset space. Despite many efforts by lawmakers to actually create legislation that clarifies the regulatory framework for digital assets, no definitive bill has been passed just yet.

SEC Also Delays Decision on VanEck's Ether ETF

Meanwhile, the SEC has also delayed making a decision on an application by asset manager VanEck for a spot Ether ETF. This postponement,which was announced on Mar. 20, gives the SEC until May 23 to finalize its verdict on the proposed ETF. The SEC explained that the extension is to allow enough time for thorough consideration of the rule change proposal associated with this ETF.

However, this delay is not isolated. It actually follows similar postponements concerning spot Ether ETF applications from Hashdex and ARK 21Shares. These deferrals have led Bloomberg ETF analyst James Seyffart to predict a likely denial of these Ether ETF applications by their May 2024 deadlines.

The SEC did approve U.S. exchanges to list and trade shares of spot Bitcoin ETFs in January, with the majority of commissioners approving the necessary rule changes. However, concerns over crypto ETFs continue to pop up. U.S. Senators Jack Reed and Laphonza Butler even urged Gary Gensler to reject Ether ETF applications because of the potential "enormous risks" they pose to retail investors.

ETH ETFs Inevitable?

On the other hand, some people are still hopeful that a spot ETH ETF is a matter of “when” and not “if”. The approval process for spot Ether ETFs is facing some delays, with a final decision deadline looming in May. The hesitation stems from large financial institutions' lack of a cohesive internal strategy to navigate the approval landscape, according to Robby Greenfield, CEO of Umoja. The challenge for these institutions lies in their inability to employ market-manipulation strategies familiar with traditional commodities, due to the decentralized and non-physical nature of cryptocurrencies like Bitcoin and Ether.

Greenfield holds firm that these delays do not dampen his expectations of approval, with the decentralized aspect of cryptocurrencies posing a big challenge but not that is impossible to overcome. Greenfield even goes as far as to state that an ETH ETF is an inevitability.

Despite the potential for Ether ETFs, large institutional players are still pretty cautious about diving into decentralized finance (DeFi) due to the current lack of suitable infrastructure and guarantees necessary for big investments. This hesitation naturally also affects traditional retail investor participation.

Umoja, under Greenfield's leadership, plans to bridge this gap by focusing on allowing retail access to smart investment strategies. Umoja recently secured an additional $2 million in funding, raising their total seed funding to $4 million. This investment will expand retail investors' access to asset management strategies. Retail investment plays a massive role as it accounted for about 52% of global assets under management in 2021. This figure is expected to increase to 61% by 2030.