Unpopular Opinion: The SEC will not approve an Ethereum ETF

Unpopular Opinion: The SEC will not approve an Ethereum ETF on Mary 23rd. I will lay out my case for why this will be delayed and its implications for the cryptocurrency market. You’re definitely going to want to read this.

  

In the past @GaryGensler has stated that he does not believe that Ethereum is a security and past SEC chair’s have also stated as much. However, everything changed September 15, 2022.

Call me crazy but I think market is underestimating the chance that Gary Gensler approves the ETH ETF…

…while still trying to claim that ETH is a security pic.twitter.com/aL0dlvFkk6

— Evan Van Ness 🧉 (@evan_van_ness) May 15, 2024

 

On September 15, 2022 the Ethereum Foundation was successful in changing its consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS). The benefits of this change were to eliminate miners and their high energy consumption, reduce environmental impact, improve scalability issues, and lower hardware requirements.

 

The change from POW to POS prompted SEC Chair Gary Gensler to change his previous stance on Ethereum and hinted that the commission could classify POS networks as securities because “the investing public is anticipating profits based on the efforts of others.” (Stephanie Murray, The Block, September 2022)

 

On March 20, 2024 a Fortune article stated that the SEC had opened a probe and began issuing subpoenas to companies associated with the Ethereum Foundation dating back to September 2022. (Fortune, March 2024)

 

While much of this is happening in the shadows, Greyscale sued the SEC regarding the consistent denial of their Bitcoin ETF issuance. On August 29th, 2023 the U.S. Court of Appeals for the DC Circuit issued a ruling against the SEC in favor of Greyscale stating that the SEC acted “Arbitrarily and capriciously” in its denial of a spot Bitcoin ETF while approving two separate Bitcoin Future ETF’s. (Dechert, September 2023)

 

It is important to note that Ethereum is not mentioned in the Greyscale lawsuit and was not included in the court of appeals judgment. However, this judgment springboarded the cryptocurrency market out of Crypto Winter and was the catalyst for the next bull season.

 

On January 10th, 2024, the day of the Bitcoin ETF approval, Gary Gensler made a statement regarding its approval, “Importantly, today’s Commission action is cabined to ETPs holding one non-security commodity, bitcoin. It should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities. Nor does the approval signal anything about the Commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto asset market participants with the federal securities laws.” 

 

Shortly after the Fortune article on 3/20/24, Coindesk reported that on February 26,2024 The Ethereum Foundation changed a footnote on their website stating: “The Ethereum Foundation (Stiftung Ethereum) has never been contacted by any agency anywhere in the world in a way which requires that contact not to be disclosed. Stiftung Ethereum will publicly disclose any sort of inquiry from government agencies that falls outside the scope of regular business operations.”This statement was modified to the following: “we have received a voluntary enquiry from a state authority that included a requirement for confidentiality.” (Coindesk, March 2024)

 

A Few days before the March 20, 2024 Fortune Article, Ethereum began a retracement from its local top after having increased 154% over a span of ~190 Days. The fact that this retracement started a week before the article was published should be a surprise to nobody as there are always insiders that are aware of forthcoming articles. Did the foundation begin to dump? Some prominent influencers postulate that they did. Since that retracement Ethereum has consistently decreased along a strong resistance line.

 

Shortly after the Bitcoin judgement for Greyscale by the U.S. District Court of Appeals in August of 2023 the Greyscale Ethereum Trust (ETHE) Discount to Nav began rocketing from -40% to as high as -8% on 3/8/2024. Upon which it mysteriously began to re-trace. Once again this is proof that insiders had knowledge of the forthcoming Fortune article and SEC decision making.

Once it was understood that Bitcoin spot ETF’s would be approved after the Greyscale Judgement, Bitcoin Dominance bounced from its all-time low support line and began a steady rise upwards. Culminating in a volume spike and breakout of a long-trending resistance line that had held ever since Ethereum’s inception. It continues to rise to this day.

 
On April 25, 2024, Reuters reported that insiders for current applications of the Ethereum ETF’s have stated that conversations with the SEC have been drastically different than Bitcoin ETF Discussions. Over the span of the previous four weeks hese discouraging, one-sided, meetings have given issuers the impression that the SEC will not be approving Ethereum ETF’s on their May 23rd and May 24th deadline for VanEck and ARK, respectively. (Reuters, April 2024)

 

On May 8th, 2024, Reuters reported that Greyscale withdrew its 19b-4 filing application for an Ethereum Futures ETF on May 3rd. There was no reason given for withdrawal. However, many speculate that it was because the Greyscale filing was filed pursuant to the Securities Exchange Act of 1934, whereas the pre-existing approved Ethereum ETF’s by VanEck, Proshares, and ARK were filed pursuant to the Investment Company Act of 1940.

 

This is where it gets technical! Similar to Whiskey and Bourbon, All ETFs are ETPs, but not all ETPs are ETFs. ETPs include Exchange Traded Funds (ETFs), Exchange Traded Commodities (ETCs), and Exchange Traded Notes (ETNs). The SEC’s 2021 approval of Grayscale’s Bitcoin futures under the Securities Exchange Act of 1934 led to Grayscale’s lawsuit success. Funds under the 1940 Act face stricter SEC scrutiny and higher standards. The recently approved 11 Bitcoin ETPs are technically not ETFs.

 

Democrats in Congress and the Biden administration argue that Bitcoin ETP issuers mislead investors by labeling them as ETFs. They urge the SEC to block crypto ETPs that are not sufficiently decentralized. Most cryptocurrencies use Proof-of-Stake, making them less decentralized and more like securities, unlike Bitcoin’s decentralized Proof-of-Work system.

 

This is the reason that Greyscale pulled their application. It’s because filing under the 1934 act as a security would force them to prove that Ethereum is not a security and is sufficiently decentralized. “Studies show that cryptocurrencies, including ether, are susceptible to manipulation,” former associate general counsel for the SEC Benjamin Schiffrin told MarketWatch, adding: “Wash trading is rampant in this space, and regulators can’t protect investors against fraudulent and manipulative acts and practices” as the law says they must before approving rule changes.

 

The SEC’s approval of an Ether Futures ETF under the 1940 Act doesn’t guarantee approval for an Ethereum Spot ETF, which must meet higher protection standards. Futures contracts are well-regulated by the Chicago Mercantile Exchange and less prone to wash trading. In contrast, Spot Ethereum can be easily manipulated by large exchanges like Binance, which are not under SEC or FTC jurisdiction.

 

Finally, SEC will likely argue that Ethereum and other Proof-of-Stake cryptocurrencies are securities, not commodities, requiring regulation under the 1934 Act. Consequently, Ethereum spot ETFs may be rejected, leading to a potential lawsuit between the SEC and Ethereum or VanEck/Ark. This legal battle could delay Ethereum ETF approval, causing funds to shift to Bitcoin, boosting its dominance. Translation: Buy BTC, as it’s the only guaranteed commodity until the SEC’s stance changes.

 

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Easy Zabbo Twitter: https://twitter.com/EasyZabbo