The SEC Process for Approving ETFs

The SEC’s Ethereum (ETH) exchange-traded fund (ETF) approval process is full of controversy and questions. First, the cryptocurrency industry can’t even agree on whether the news itself constitutes an endorsement — the SEC hasn’t yet approved the products for trading, after all .

But perhaps what we should pay the most attention to is the compromise on including staking in deposits. At best, it’s a sign that product providers have reached a truce with the securities watchdog. But more likely, it indicates the regulator’s willingness to keep the backdoor open to further scrutiny.

Staking has been a particularly contentious issue for Ethereum ETFs, with both camps arguing over the interpretation of the infamous Howey Test when it comes to staking. From the SEC’s perspective, staking meets all four requirements to be considered an investment contract. According to the watchdog, staking involves investing money in a joint venture (i.e. the blockchain ecosystem) with the expectation of profits by relying on the efforts of others – c i.e. blockchain validators and developers. Therefore, they argue that staking as collateral should be regulated in their jurisdiction.

about: Bitcoin can grow in leaps and bounds by becoming more like Ethereum

But the opposite argument is that signing is different from traditional investment contracts, because it is more like a technical service: it involves locking cryptocurrency tokens to secure the network and ensure its proper functioning. Additionally, rewards do not actually come from the work of validators or developers, but are coded into the smart contract itself.

This debate has raged for a long time, which is why the SEC’s capitulation is certainly suspect. It’s as if the agency has reluctantly admitted defeat in the ETF space, knowing it still has one tool left in its arsenal. As such, it is certainly too early for Ethereum proponents to declare complete victory.

Daily active users of Ethereum between January 2022 and May 2024. Source: Grayscale

At the very least, we will need to get approval for S-1 filings, which would allow ETFs to actually trade. Although BlackRock has purportedly updated its S-1 filing, which may be a good sign, there is no guarantee of a quick decision. It could be approved as early as next month, but it could also take months. There are simply no absolute guarantees due to the political vacuum the United States finds itself in this year.

In fact, there is no doubt that last week’s rushed approval of 19b-4 was a politically motivated decision. The House of Representatives’ passage of the new cryptocurrency-focused FIT21 bill – with strong support from Democrats – signals a shift in views on digital assets from some in the US government. But since we have no idea what that government might look like after this year’s presidential election, there may be very little certainty about the future regulatory stance towards cryptocurrencies.

Related: Cryptocurrencies Fuel Unrest Among Democrats Ahead of 2024 Elections

Regardless of the regulation, once ETFs start trading – which is the base case scenario – we will likely see a further rise in the price of ETH. To some extent, this probably also marks the start of the “alternate season” that everyone has been waiting for. But it may be wrong to hope that this rising tide will lift all boats. It is clear to me that the focus will now remain firmly on the Ethereum ecosystem, rather than other chains. Everyone who announces the imminent approval of spot ETFs tracking the prices of Solana (SOL), Ripple (XRP), etc. should temper their expectations. It will likely take some time for the SEC to feel generous to the rest of the cryptocurrency ecosystem.

Whether an ETH ETF is available or not, most altcoins will remain highly speculative investments driven by sentiment and retail interest. In fact, even for Ethereum itself, institutional interest is not as guaranteed as for Bitcoin. The same level of demand simply does not exist for spot ETH ETFs as we see with Bitcoin ETFs. Given the continued uncertainty around staking, institutional investors will likely take a more cautious approach.

So, with all this regulatory and political uncertainty, investors would do well to stay balanced. We could face a long period of regulatory scrutiny, political posturing and frustrating lack of clarity. As we know, markets don’t like this and tend to respond with volatility. As such, a selloff in ETH and other altcoins is as likely in the near future as a rally. The outlook will largely depend on the outcome of the election and how the SEC’s stance on staking evolves.

Preparing for different outcomes at this stage is extremely important for a successful investment or trading strategy, as the risk of ending up on the wrong side of the trade is simply too high when dealing with such binary outcomes. What is clear is that the SEC is almost certainly not finished with its attempts to classify parts of the cryptocurrency ecosystem as securities, and the staking process may prove to be too big a compromise for the watchdog.

Lucas Kelly He is a guest columnist for Cointelegraph and chief investment officer of Yield App, where he oversees portfolio allocations and leads the expansion of its diverse portfolio of investment products. He was previously chief investment officer at Diginex Asset Management, as well as senior trader and managing director at Credit Suisse in Hong Kong, where he led QIS and structured derivatives trading. He was also head of exotic derivatives at UBS in Australia.

This article is intended for general information purposes and is not intended and should not be relied upon as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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