Bernstein Analysts: SEC's Ether ETF Approvals Not Politically Driven

Bernstein analysts Gautam Chhugani and Mahika Sapra believe the SEC probably opted to approve ETH ETFs to avoid a legal battle.

The SEC’s approval of spot Ether (ETH) exchange-traded funds (ETFs) was likely not as influenced by political pressure as many people in the industry thought. Analysts from Bernstein indicate that the SEC's decision was likely made to avoid legal challenges. Meanwhile, the European Union elections could have a major impact on crypto regulations, and could potentially favor ETH ETFs. In the U.S., Bitcoin ETFs represent about 26% and 56% of year-to-date inflows for BlackRock and Fidelity, respectively. Meanwhile, Australia is also jumping on the Bitcoin ETF trend, and is set to launch the Monochrome Bitcoin ETF (IBTC) on Jun. 4.

Political Pressure Debunked

The United States Securities and Exchange Commission's (SEC) decision to approve spot Ether (ETH) exchange-traded funds (ETFs) may not have been influenced by last-minute political pressure, according to analysts at research and brokerage firm Bernstein. One theory suggested that the SEC's sudden shift in favor of spot Ether ETFs in May was due to increased political pressure aiming to attract swing voters ahead of the upcoming U.S. election in November.

However, this theory certainly lost some of its credibility after President Joe Biden vetoed the SEC’s Staff Accounting Bulletin (SAB) No. 121 repeal bill, according to Bernstein analysts Gautam Chhugani and Mahika Sapra in a Jun. 3 report.

The analysts believe that the SEC likely knew it was cornered on the issue of the ETH ETF as it shared the same regulatory set-up as the spot Bitcoin ETFs, including the same spot and futures correlation and several live Ether futures products on the Chicago Mercantile Exchange, which implies Ether’s commodity status.

As a result of this, the SEC probably opted for a more pragmatic approach to avoid a legal battle. Although ETH ETF approvals did not happen for the reasons most people thought, it is still a great outcome for the industry.

Bernstein also revealed that some spot Ether ETF applicants were actually surprised by the SEC’s last-minute approval. Before the approval, the SEC's lack of communication was interpreted as a likely denial.

However, ETF issuers were asked to refile the 19b-4 forms within 24 hours, just four days before the approval date. Despite the unexpected approval, Bernstein, like most analysts, predicts that the flow of investments into spot Ether ETFs will be lower than that of Bitcoin ETFs, though there is expected to be pent-up demand from similar participants.

The SEC officially approved 19b-4 applications from VanEck, BlackRock, Fidelity, Grayscale, Franklin Templeton, ARK 21Shares, Invesco Galaxy, and Bitwise to issue spot Ether ETFs on May 23. The eight approved Ether ETF issuers are now awaiting the SEC’s sign-off on their S-1 registration statements, which could take from a few weeks to several months.

EU Vote A Turning Point for Ether ETFs

On the other hand, politics may still pave the way for ETH ETFs in Europe. The upcoming European Union elections from Jun. 6 to Jun. 9 could hugely impact crypto regulations and the approval of spot ETH ETFs.

According to Jag Kooner, head of derivatives at Bitfinex, the elections might be a wildcard moment for shaping future crypto regulations, as right-wing and populist parties are expected to gain ground. This shift could influence regulatory stances, which could then lead to either more stringent controls or supportive policies depending on the new parliament's composition.

Right-wing parties are anticipated to gain a bit more ground, and could possibly introduce more protective measures for the crypto industry. Marina Markezic, co-founder and executive director of the European Crypto Initiative (EUCI), suggested that the right-wing trend might impact the Commission's activities, including the portfolios of upcoming Commissioners, showing more protectionist tendencies.

However, this political shift could also result in newfound allies for innovation-friendly crypto regulations, with representatives from the far right potentially adopting the counter-status quo rhetoric of the crypto industry, providing unexpected support for crypto advocacy in Brussels and Strasbourg.

The election outcome could also affect the implementation of the Markets in Crypto-Assets (MiCA) bill, the first comprehensive regulatory framework for cryptocurrencies in the EU, which is set to take full effect in December 2024.

Despite the possibility of more conservative crypto regulatory policies, spot Ether ETFs are gaining more and more traction with financial institutions in Europe. After the approval of 19b-4 filings for eight spot Ether ETF issuers by the United States SEC on May 23, confidence in Ether ETFs has been steadily growing among European financial institutions.

Kooner also believes that the possible approval of Ethereum ETFs in the EU is gaining momentum, with VanEck and Franklin Templeton already listing their ETH ETFs on the DTCC in anticipation of regulatory approval. This move sets a strong precedent for the EU, where the MiCA regulation's framework could facilitate similar approvals.

Additionally, some of Europe’s largest banks are moving into the crypto space, thanks to the clarity offered by the MiCA bill. Germany’s largest federal bank, the Landesbank Baden-Württemberg (LBBW), announced in April it would offer crypto custody services to institutional clients starting in the second half of the year. Raiffeisen, the largest community banking group in Austria, partnered with Bitpanda to offer digital asset services to retail banking customers.

Bitcoin ETFs Boost BlackRock and Fidelity Inflows

Spot Bitcoin ETFs are also doing well. In fact, BlackRock and Fidelity's spot Bitcoin ETFs have accounted for a large share of the issuers' total ETF inflows this year.

According to Bloomberg ETF analyst Eric Balchunas, Bitcoin ETFs represent 26% and 56% of year-to-date inflows for BlackRock and Fidelity, respectively. BlackRock's iShares Bitcoin Trust (IBIT) and the Fidelity Wise Origin Bitcoin Fund (FBTC) have seen inflows of $16.6 billion and $8.9 billion since their launch almost five months ago, according to Farside Investor data.

Despite this, Vanguard, which does not offer any Bitcoin ETFs, is far in the lead with $102.8 billion in total ETF inflows in 2024, surpassing BlackRock at $65.1 billion. BlackRock lists 433 ETFs holding a total of $2.8 trillion in assets under management (AUM), according to Stock Analysis. Fidelity lists only 70 ETFs, and has about $74 billion in AUM.

On May 28, BlackRock's IBIT surpassed the Grayscale Bitcoin Trust (GBTC) as the world's largest spot Bitcoin ETF, and now holds around 291,567 BTC, according to the Apollo Bitcoin Tracker. Grayscale, which initially held 620,000 Bitcoin when GBTC converted to spot form, has seen massive outflows and now holds 285,139 BTC.

Bitcoin ETF flows have leveled out recently, with many issuers recording days of zero inflows and outflows. For instance, the Franklin Bitcoin ETF (EZBC) has had no inflow or outflow since May 16, according to Farside Investors.

Australia's First Spot ETF That Holds BTC Directly

Meanwhile, Australia's first spot Bitcoin ETF, which directly holds the asset, is set to launch for trading on Jun. 4. The Monochrome Bitcoin ETF (IBTC) will start trading on the Cboe Australia exchange.

While Australia already has several exchange-traded products offering exposure to Bitcoin, Monochrome Asset Management is the first to receive approval under a new crypto asset licensing category created under Australian Financial Services (AFS) licensing rules in 2021. This allows the ETF to hold Bitcoin directly, with holdings stored offline in a device not connected to the internet.

Before IBTC, Australian investors could only invest in ETFs that indirectly held Bitcoin or through offshore Bitcoin products, both lacking the investor protection rules under the directly held crypto asset AFS licensing regime. Unlike its U.S. counterparts, which are cash-create, the ETF allows in-kind redemption from investors.

Monochrome CEO Jeff Yew believes there will be strong interest in the ETF, especially considering the growth of indirect Bitcoin ETF products in recent months. Yew also confirmed that the firm is ready to launch an Ether ETF, which will also hold the asset directly.

The launch of IBTC in Australia comes after the recent introduction of four spot Bitcoin ETFs in Hong Kong on Apr. 30, three of which have seen net outflows since launching. In contrast, U.S. Bitcoin ETFs have seen huge inflows, despite $17+ billion in outflows from the Grayscale Bitcoin Trust.

According to Yew, Australia is a "very crypto-heavy country" and he now expects local spot Bitcoin ETFs to generate between $3 billion to $4 billion in net inflows in the first three years.