Ethereum ETF Approvals A Giant Political Issue: Joseph Lubin

Although Lubin believes spot ETH ETFs will be approved, he still warned that the process could drag on because of political issues as the US elections crawl closer.

Joseph Lubin, CEO of Consensys, recently discussed the political implications of spot Ethereum ETFs at DappCon in Berlin. He is confident in their approval but warned of potential delays due to political factors. Lubin also criticized the SEC's approach under Gary Gensler, and accused the agency of creating uncertainty. The CEO is not alone in his frustrations, as the SEC is also being pressured to make up its mind over classifying ETH as a security or a commodity. Meanwhile, the U.S. House of Representatives recently passed the FIT21 Act which will clarify the SEC’s and the CFTC’s regulatory roles over digital assets.

Ethereum ETFs Now a Political Issue

Joseph Lubin, the CEO of Consensys, recently spoke at DappCon in Berlin. He believes that the approval of early-stage applications to launch Ethereum exchange-traded funds (ETFs) in the United States is almost certain. Lubin also mentioned that several 19b-4 applications filed by firms like BlackRock are expected to be approved by the U.S. Securities and Exchange Commission (SEC).

However, he did warn that the public launch of these ETFs could still be delayed because of political factors. Lubin also mentioned that representatives from Donald Trump’s presidential campaign have been actively trying to engage with the crypto community. This is very likely part an effort to throw together a pro-crypto strategy ahead of the elections in November.

Lubin also talked about the increasing pressure on the SEC to adopt a more neutral stance as the elections approach, especially considering the growing number of voters now holding digital assets.

Additionally, Lubin accused the SEC of gaslighting the crypto industry by creating uncertainty and overstepping its mandate to regulate securities by targeting technology and developers.

In April, Consensys started legal proceedings against the SEC, challenging what Lubin described as an undisclosed move to reclassify ETH as a security. Lubin compared the current situation with previous dealings with the SEC under Jay Clayton, which were much more constructive in his opinion.

According to Lubin, the change in approach started when Gary Gensler took over as SEC chairman. Lubin also suggested that high-level banking and government factions are trying to push the Ethereum ecosystem into a form of American-style decentralization with very strict regulatory requirements.

Consensys complied with the SEC’s requests, but decided to take legal action mostly due to concerns over the SEC’s shifting focus towards MetaMask, staking, developers, and Ethereum's proof-of-stake transition. The lawsuits against Binance and Coinbase, along with Wells notices to other ecosystem players like Robinhood, prompted Consensys to act. Lubin now plans to push the SEC to clarify its stance on whether ETH is considered a commodity or security.

BlackRock & Others Amend Ether ETF Filings

Three United States-based asset managers, BlackRock, Grayscale, and Bitwise, have amended their 19b-4 filings with the SEC for spot Ether ETF applications. These amendments were filed on May 22 and included the removal of provisions for staking.

BlackRock's filing with the Nasdaq Stock Market explicitly stated that neither the Trust, nor its associated parties, would engage in actions involving Ethereum proof-of-stake validation or using ETH to earn additional income. Grayscale and Bitwise made similar changes in their own filings with the New York Stock Exchange Arca.

On May 21, other asset managers including Fidelity, VanEck, Franklin Templeton, Invesco Galaxy, and ARK 21Shares also amended their applications to remove staking provisions.

The SEC's decision on these applications, particularly for VanEck, is expected by May 23, which is the final deadline for approval or denial.

Ether's Security Status Sparks Congressional Inquiry

The political influence in Ethereum’s narrative is very clear as members of the United States Congress are asking for clarity on communications between the SEC and the Financial Industry Regulatory Authority (FINRA) with regards to the establishment of Special Purpose Broker-Dealer (SPBD) requirements. They suspect the organizations as well as crypto trading and custody services provider Prometheum are setting an unwelcome precedent.

House Financial Services Committee Chairman Patrick McHenry and subcommittee heads Bill Huizenga and French Hill shared in a letter to SEC Chair Gary Gensler that they are very dissatisfied with his response to a previous inquiry about the classification of ETH as a security rather than a commodity and Prometheum's SPBD application.

Gensler responded to the Mar. 26 letter by saying he was unaware of Prometheum’s future business plans. The congressmen, however, suspect that the SEC and FINRA very likely discussed SPBD-related activities during Prometheum’s application process.

They have requested all nonpublic communications and records exchanged between the SEC and FINRA about Prometheum’s SPBD application, allowable SPBD activities, digital asset securities eligible for custody by an SPBD, and the regulatory classification of ETH, setting a deadline of Jun. 5 for a response.

Prometheum has been a very controversial topic in the crypto space ever since it received SPBD approval from FINRA in May of 2023. The company launched a custody service for ETH as a security on May 17, despite the still ongoing debates over its classification. Prometheum's CEO, Aaron Kaplan, has vocally defended the company’s compliance to federal securities laws, and is advocating for the regulation of crypto under the existing securities frameworks.

The Blockchain Association, a crypto lobby group, has also raised some concerns. They filed a Freedom of Information Act request for SEC documents related to Prometheum. The association's counsel, Marisa Tashman Coppel, pointed out that the approval of Prometheum’s SPBD amid aggressive SEC enforcement is very suspicious.

FIT21 Approved

Meanwhile, the regulatory landscape for the crypto industry could soon change as the United States House of Representatives has voted in favor of H.R.4763, also known as the Financial Innovation and Technology for the 21st Century (FIT21) Act, with a 279 to 136 vote on May 22.

The bill aims to provide more regulatory clarity over digital assets by defining the roles of the SEC and the Commodity Futures Trading Commission (CFTC). Seventy-one Democrats joined 208 Republicans in supporting the legislation.

Before the vote. Representative Patrick McHenry criticized the current regulatory framework, arguing that it hinders the full potential of digital asset innovation. He described the situation as a "food fight" between the SEC and CFTC over control of digital asset classes.

On the other hand, Representative Maxine Waters opposed the bill and warned that it would create a "regulatory no man’s land" for cryptocurrencies and allow traditional finance firms to operate without the needed SEC oversight. Waters is also very concerned that the bill could lead to a market crash and recession, and even called it one of the most harmful proposals she has seen in a long time.

In addition to the FIT21 Act, the House is set to vote on H.R. 5403, the Central Bank Digital Currency (CBDC) Anti-Surveillance State Act, which plans to prevent the Federal Reserve from issuing a digital dollar through intermediaries.