Cryptocurrency frenzy is heating up thanks to the innovative launch of a Bitcoin ETF, with seven issuers now asking US regulators to go after Ether, the world's second-largest cryptocurrency They are pressing for the green light to be given to the funds.
But the exchange-traded fund crowd, including those who last fought to win approval from U.S. Securities and Exchange Commission Chairman Gary Gensler, is sending a somber message to digital currency proponents.
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For now, issuers not in the race to apply for Ether argue that the token's legal status is ambiguous. Some caution that the SEC is unlikely to capitulate just because it approved 10 Bitcoin spot funds in January, given the significant differences in the underlying market infrastructure.
The SEC has until May 23 to respond to either application, and the regulator will approve or deny the application from VanEck. If the request is denied, issuers seeking approval will have to reapply or face the possibility of challenging the regulator's decision through litigation.
Ether has been rising on hopes for quick approval and is up about 50% so far this year, mirroring the high-profile rally in Bitcoin. Ether is the native token of Ethereum, the most commercially used blockchain, and allows users to run applications on the protocol.
Crypto asset management company Bitwise, for example, is taking a cautious approach. The San Francisco-based company's Bitcoin ETF has attracted more than $1 billion in assets since it began trading, but Bitwise has not filed for a Spot Ether ETF.
“We want to apply for a product that ultimately gets accepted, rather than just throwing pasta against the wall,” said Bitwise general counsel Katherine Dowling. “We want to have an open dialogue to take into account any concerns they may have.”
Stephen McClurg, chief investment officer at Valkyrie, also told The Block that he doesn't expect a Spot Ether ETF to appear anytime soon, and is instead looking to the next year or two. McClurg did not respond to requests for comment.
ether status
One potential hurdle is the SEC's position on the legal classification of Ether, specifically whether Ether should be considered a commodity or a security. For an Ether ETF to be approved, the SEC would “need to reach a de facto conclusion that ETH is not a security,” said Matthew Frankl, a partner at law firm Haines Boone.
The current application is filed assuming that Ether is a product similar to Bitcoin. However, if regulators decide between now and May 23 that Ether is instead a security, a whole ecosystem of regulatory entities surrounding ETFs will be introduced, which is not set out in the current filing. become.
“If it's a security, it needs to be traded on a registered exchange, and Coinbase is not registered. If you want to buy or sell a security, it has to be done by a broker-dealer,” Frankl said. Told. Coinbase Global Inc. is the largest cryptocurrency trading platform in the United States.
Richard Kerr, a partner at K&L Gates, said these barriers could be “deadly” for Ether ETFs. “There are a lot of bells and whistles that come with owning a pool of securities.”
Correlation research
Perhaps another condition for approval is that the issuer successfully demonstrates the correlation between Ether pricing in the spot and futures markets, proving that Ether cannot be manipulated unless the perpetrators are caught. . It is unclear whether the SEC will be satisfied with the Ether-related correlation analysis. Dowling said this could be a problem because Ether has a shorter data history than Bitcoin.
“Obviously, the Ether futures market is not as robust and mature as the Bitcoin futures market. It is several years behind,” Kerr added. “Thus, if the SEC is not satisfied with the correlation analysis, it could deny the application.”
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Establishing a correlation will show that Ether spot and futures are similar products, and that exchange oversight sharing agreements are effective in detecting fraud.
Coinbase submitted public comments to the SEC, arguing that Ether's market depth and price correlation across the spot market “strongly indicates” the market is resistant to fraud and manipulation. Coinbase acts as a custodian for most Bitcoin ETFs.
staking
Finally, Ether's staking mechanism can complicate the process. Some applications, namely those from Ark Investment Management and Franklin Templeton, support staking, or the ability for Ether holders to lock their tokens into the Ethereum network to validate transactions and earn additional revenue. I am proposing to make it possible.
The SEC said in its lawsuit against Coinbase and Kraken that it considers staking services to be an offering of securities.
Greg Zetaris, general counsel at Multicoin Capital, which represented clients seeking to register crypto ETFs with the SEC, said the staking services offered by ETF issuers are different from those offered by Coinbase and Kraken. . That's because the ETF trust itself is the owner of its assets, rather than offering staking as a service, he said.
But staking also introduces new layers of complexity with potential tax and operational issues, and staking will need to be “carefully designed” to fit within that framework, Zetalis says. he said.
The matter may eventually end up in court. Grayscale’s legal victory against the SEC in August paved the way for the approval of a Spot Bitcoin fund.
Dave Lovell, Grayscale's global head of ETFs, said approval is “a matter of when” and could take further legal action if necessary to get the Ether ETF approved. has not been excluded.
“If we don't get approval, someone will probably challenge it in court,” Multicoin's Zetaris said.
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