What are Spot Ethereum ETFs? (Updated 2024)

The debate over Ethereum's classification

The debate on how to classify cryptocurrencies is what has been at the center of the dispute between the regulatory agency and the crypto sector.

In 2018, William Hinman, who served as the Director of the SEC’s Division of Corporation Finance from 2017 to 2020, classified Bitcoin and Ether as non-securities on the grounds that their decentralized nature, as well as their functional characteristics used for storing value and conducting transactions, didn’t meet the definition. Since then, Gary Gensler, who took over Jay Clayton’s role as SEC chairman in 2020, has argued that cryptocurrencies meet the definition of securities, which would subject them to more stringent regulations.

In contrast, the Commodity Futures Trading Commission has classified crypto as a commodity, which would place it under a different regulatory regime. Many contend that cryptocurrencies don’t neatly fit into existing regulatory categories, a position that Gensler disagrees with.

In an article for Coin Telegraph in January, Lucas Kiely, chief investment officer of Yield App, wrote that the justifications for the SEC’s decade-long fight against a Bitcoin ETF were nothing short of political. With the recent approval of a spot Bitcoin ETF, Kiely asserted that the SEC has now settled the debate over crypto’s classification as a commodity. He contended that there should be no reason to delay the approval of Ethereum ETFs, given the similarities between Bitcoin and Ethereum in terms of their decentralized nature and widespread adoption.

Kiely’s argument raises a question about the consistency of the SEC’s approach to cryptocurrency classifications. If the SEC had provided clear guidance on classifying Bitcoin as a non-security, it would seem logical that this classification could have automatically applied to Ether.

However, the approval of spot Bitcoin ETFs depended on the SEC allowing specific rule exceptions to be made, instead of reclassifying Bitcoin as a security. The rule change was not automatically extended to other cryptocurrencies, and SEC Chairman Gensler indicated that the agency would take a case-by-case approach in evaluating ETF proposals for other cryptocurrencies.

Additionally, there are several differences in the function of the two cryptocurrencies. Bitcoin is primarily seen as a decentralized digital currency, whereas Ether is tied to Ethereum’s blockchain platform, smart contracts and dApps, leading to classification complexity. Ether’s use as a working currency, unlike Bitcoin’s primary function as a store of value, may pose additional challenges.

The SEC approves spot Ethereum ETFs

In a landmark decision, the SEC approved a rule change that would allow spot Ether ETFs on May 23, the deadline for a decision on the VanEck Ethereum Trust. The SEC also approved the Grayscale Ethereum Trust, the Bitwise Ethereum ETF, the iShares Ethereum Trust, the ARK 21Shares Ethereum ETF, the Invesco Galaxy Ethereum ETF, the Fidelity Ethereum Fund and the Franklin Ethereum ETF.

Early on in 2024, analysts predicted that Ether ETFs would have a “clear path” to approval following the sweeping approval of 11 spot Bitcoin ETFs. At that time, the odds of a spot Ethereum ETF by May were pegged at 70 percent by Bloomberg ETF analyst Eric Balchunas, who later reduced his estimate to 35 percent on March 11.

“All the signs/sources that were making us bullish 2.5mo out for BTC spot are not there this time,” he posted to X, the social media platform formerly known as Twitter.

He wasn't the only one reigning in expectations. FOX reporter Eleanor Terrett had tweeted on March 10 of one-sided talks between issuers and the SEC coupled with opposition from a group of lawmakers who wanted the SEC to halt crypto ETF approvals. Despite these challenges, some reacted to the 21-day public comment period commenced by the SEC on April 2 with optimism. However, Bloomberg ETF analyst James Seyffart was quick to curb enthusiasm, pointing out that the SEC was merely following standard procedure.

“Every single 19b-4 ETF filing goes through the same process (whether approved or denied). It's not ‘bullish’ in any capacity for Ethereum ETFs,” he posted on April 3. Regulators remained quiet on the issue, and expectations continued to drop.

Then, on May 20, CoinDesk and Reuters reported that the SEC asked the Nasdaq, CBOE and NYSE to update their 19b-4 filings for the ETH ETF applications “on an accelerated basis.” The price of Ether jumped from US$3,143 to US$3,472 in just over 20 minutes following the news breaking. Eric Balchunas and James Seyffart increased their odds of VanEck’s 19b-4 form being approved — a crucial step in the process of launching a spot Ether ETF — from 25 percent to 75 percent.

On May 21 (Tuesday), Seyffart posted an update: “It's happening. We have at least 5 of the potential #Ethereum ETF issuers that have submitted their Amended 19b-4's in the last ~25 min.

Fidelity, VanEck, Invesco/Galaxy, Ark/21Shares, & Franklin all submitted via CBOE.”

However, he later pointed out that the “approvals” do not necessarily mean immediate launches of Ether ETFs, emphasizing that there will likely be a waiting period between approval and actual availability to investors.

News of spot Ether ETF approval broke around 5:00 p.m. EDT, contributing to a minor increase in Ether's value to over US$3,900.

According to multiple outlets, issuers updated their filings to confirm they will not stake ETH for yield to address SEC concerns surrounding the complexities of cryptocurrency staking, including market risks, custody and control, and potential conflicts of interest.

Following the approval of 19b-4 forms by the SEC, the S-1 registration statements must become effective before trading of Ether ETFs can begin. VanEck handed in an amended version of its S-1 forms to the SEC right after approval, with BlackRock doing the same on May 29. According to sources for The Block, the SEC has requested all remaining parties to hand in amended versions of their forms by May 31. Weeks of amendments are expected to follow before trading can commence. Balchunas has stated that a June launch could be a "legit possibility" but reiterates that sometime around July 4 is more likely.

Investor takeaway

In January, financial services company Standard Chartered predicted that the price of Ether would reach US$4,000 by the approval deadline of May 23, a price it has not seen since December 2021. It has since surpassed that landmark, going as high as US$4,070 on March 11, according to data gathered from CoinGecko.

However, Ether's price had cooled to just below US$3,000 as of mid-May as optimism of approval dwindled. The possibility of a launch happening sooner rather than later has caused Ether's price to surge above US$3,700. As of 7:23 p.m. EDT on May 30, Ethereum was valued at US$3,749 per ETH.

Importantly, as reported by Bloomberg, analysts at Standard Chartered have also predicted that Ether will likely not experience the immense selloffs that Bitcoin experienced in January. When Grayscale’s Bitcoin Trust was converted to a Bitcoin ETF, holders were able to make redemptions, leading to a significant outflow that resulted in a 20 percent drop in the price of Bitcoin. Grayscale’s Ethereum Trust holds far less of Ether’s market cap, making it less prone to significant losses from a sell-off than Bitcoin was.

Given Ethereum’s recent price momentum and the anticipation of spot Ether ETF's impending launch, investors and market observers are closely watching to see how these factors might influence the future growth and mainstream adoption of the world’s second-largest cryptocurrency.