HashKey Global: SEC Accelerates Decision-Making Process, 5 Things You Need to Know About Ethereum Spot ETF

Author: HashKey Global

Overview

With the approval of the Bitcoin spot ETF at the beginning of the year, traditional financial capital has been continuously flowing into the cryptocurrency space over the past few months. The Bitcoin spot ETF currently holds approximately 830,000 Bitcoins, worth about $52 billion. The market has been searching for new narrative focal points, with April marking the Bitcoin halving and May focusing on the Ethereum spot ETF. As the key date for the Ethereum spot ETF, May 23, approaches, the outlook seems to have shifted from pessimism to optimism based on statements from notable figures and market fluctuations. This change was triggered early on the 21st when a Bloomberg analyst stated that the chances of the Ethereum spot ETF being approved had significantly increased to 75%, leading to a rapid surge in the crypto market, with Ethereum rising over 20% in a single day. Here are 5 things you need to know about the Ethereum spot ETF:

1) Key Date May 23

The application for the U.S. Ethereum spot ETF was first submitted by VanEck on October 27 last year, and the SEC has a total of 240 days to make a decision on the ETF application. This process includes three public comment periods, with intervals of 45 days, 45 days, 90 days, and 60 days. Before the SEC makes its final decision (approval or rejection), it has three opportunities to delay the ETF application. Additionally, the SEC has the authority to approve or deny the application at any time during the decision-making process. Based on the previous SEC approval process for the Bitcoin spot ETF, a decision will be made by the deadline of the first ETF application, which is May 23 this year.

Source: Bloomberg Intelligence

2) Is Ethereum a Commodity or a Security?

The U.S. SEC has not taken a clear stance on whether Ethereum is a commodity or a security, which the market views as a key factor in whether the Ethereum spot ETF can be approved. Below are the positions of different U.S. regulatory agencies regarding Ethereum.

In March 2023, Rostin Behnam, chairman of the U.S. Commodity Futures Trading Commission (CFTC), stated during a report to the Senate Agriculture Committee that Ethereum is the second-largest cryptocurrency after Bitcoin and is classified as a commodity. According to the "Howey Test," a standard for determining whether a cryptocurrency is classified as a security, if a cryptocurrency is defined as a security, it falls under the jurisdiction of the SEC until Congress enacts comprehensive legislation. The CFTC is attempting to solidify its position in hopes of gaining regulatory authority over Bitcoin and Ethereum.

In August 2023, a judge in the Southern District of New York ruled in a cryptocurrency class-action lawsuit that Ethereum is a commodity rather than a security. The ruling did not analyze whether Ethereum is a commodity or a security but simply reached a conclusion.

After Ethereum completed its merge in September 2023, SEC Chairman Gary Gensler mentioned that projects and intermediaries allowing staking tokens may need to undergo the "Howey Test" to determine whether they are securities, raising concerns in the market about Ethereum potentially being classified as a security after its transition to PoS. Since then, Gensler has repeatedly been asked whether Ethereum is a security, but he has not provided a clear response.

3) SEC's Approval Attitude

Compared to its attitude towards the approval of the Bitcoin spot ETF at the beginning of the year, the SEC has not shown a positive attitude towards the application for the Ethereum spot ETF. Following the SEC's delay of Franklin and Grayscale's Ethereum spot ETF applications on April 23, several analysts indicated that there had been no constructive dialogue between the SEC and ETF applicants, leading to speculation that the chances of approval on May 23 are low.

However, on May 20, the situation took a turn. According to Bloomberg ETF analyst Eric Balchunas and Fox Business reporter Eleanor Terrett, the SEC is requesting applicants to expedite the submission of the Ethereum spot ETF 19b-4 documents, suddenly kickstarting the application process. The market immediately interpreted the SEC's more positive attitude as a sign of potential approval.

4) Approval Process Mechanism

When discussing the signs of potential approval, it is essential to understand the entire process mechanism. The first step is that the application document 19B-4 (exchange rule change) must meet SEC guidelines. The second step is that the application document S-1 (registration statement) must also comply with SEC standards, and the S-1 document may require several weeks or longer for approval. The final step involves a vote by the five SEC commissioners. In the case of the Bitcoin spot ETF, two commissioners voted in favor, showing a friendly attitude towards cryptocurrencies, while two voted against it. The final vote was cast by the SEC chairman, who voted in favor, allowing the Bitcoin spot ETF to be approved. Currently, the situation for the Ethereum spot ETF is that the first step has just begun, and the subsequent developments remain uncertain, so investors should be aware of market risks.

5) Legal Battle

The market has long predicted that if the SEC rejects the application for the Ethereum spot ETF, it may face legal action from the applicants. This is because, in August last year, Grayscale won a legal battle against the SEC, with the key to the victory being Grayscale's protest against the SEC's decision to approve Bitcoin futures ETFs while lacking sufficient justification for continuing to deny the conversion of GBTC into a Bitcoin spot ETF. Ultimately, the judge ruled that the SEC's reasons for rejection were arbitrary and capricious, as the SEC failed to explain the different treatment of similar products. Therefore, the market believes that Grayscale's legal victory provides a foundation for future cases; if the Ethereum spot ETF is rejected again, the issuer can reference this case to file a lawsuit, and the SEC still faces a high risk of losing.

In October 2023, the SEC approved 9 Ethereum futures ETFs to trade in the U.S. market.

Conclusion

With only two days left until the 23rd, the SEC's attitude has shifted from negative to positive, boosting confidence in the crypto market, with Ethereum rising 20% in a single day. However, from an objective standpoint, there are still subsequent procedures involving the S-1 document and commissioner voting, and nothing is yet determined, so investors should be cautious of market risks.

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5 things you should know in the US ETH Spot ETF:

1) Key date May 23
2) ETH is commodity or security?
3) What is the stand of SEC?
4) Workflow of SEC approval
5) Lawsuit is the way

Getting closer to the key date of Ethereum spot ETF on May 23, according to the news and market conditions, the chances of approval seem to have turned from pessimism to optimism.

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