SEC approves rule change to allow creation of ether ETFs

A representation of cryptocurrency Ethereum is placed on a PC motherboard in this illustration taken on June 16, 2023.

Dado Ruvic | Reuters

The SEC has approved a rule change Thursday that would pave the way for ETFs that buy and hold ether, one of the world’s largest cryptocurrencies.

The decision comes less than six months after the Securities and Exchange Commission approved bitcoin ETFs. Those funds have proven to be a big success for the industry, with net inflows already surpassing $12 billion, according to FactSet.

Late May had long been pegged as a potential decision date for the ether funds since it coincided with a deadline for the SEC to decide whether the VanEck Ethereum ETF could proceed.

Many of the companies that sponsor bitcoin ETFs — including BlackRock, Bitwise and Galaxy Digital — have also started the process of the launching an ether fund.

The price of ether rose just 2%, although it follows a 20% surge from earlier in the week in anticipation of Thursday’s decision. Some investors may also be on pause, as the SEC’s rule change approval does not guarantee that all the funds will launch.

Specifically, the SEC’s order approves applications from various exchanges to list eight different ether funds. The order technically does not approve the funds themselves or set a date for the ETFs to begin trading.

Ether ETFs are expected to be smaller, at least initially, than their bitcoin counterparts. The Grayscale Ethereum Trust currently has about $11 billion in assets, much smaller than what the firm’s bitcoin fund was before its conversion.

The approval of the ether ETFs is a sign that the SEC’s stance toward crypto may be softening after a series of legal fights. The agency lost a lawsuit against Grayscale in 2023 that spurred the approval for the bitcoin products.

The SEC’s push to regulate crypto has also come under scrutiny by politicians. The Senate last week passed a resolution to withdraw an SEC staff bulletin about accounting rules for digital assets.

Ether is the second largest crypto asset and has become something of a blue chip coin along with bitcoin, although its value proposition is distinctly different. While bitcoin is seen primarily as a long-term store of value, an investment in ether is considered more akin to an investment in early stage technology. The ether token fuels the Ethereum network, which powers different applications, like decentralized finance (DeFi) projects, nonfungible tokens (NFTs) or the tokenization of real world assets like commodities, securities, art, real estate and more.

The applications approved Thursday do not apply to other crypto projects on the Ethereum network, said Richard Kerr, a partner in the law firm K&L Gates.

“If and when an ether product is approved, it won’t mean that a similar product for other digital assets on the Ethereum platform would be approved,” Kerr said.

Ethereum also provides opportunities for staking, which is a way for investors to earn interest on their ether holdings by locking up tokens on the network for a period of time — although ether ETFs in the U.S. may not participate. The SEC has alleged in lawsuits against Coinbase and Kraken that staking-as-a-service offerings are unregistered securities. Ark, Fidelity and Grayscale updated their filings this month to remove staking from their proposals.

The lack of staking in the ETF products is another reason why ether ETFs may see less demand than their bitcoin counterparts, said Steven Lubka, managing director at Swan Bitcoin and head of Swan Private.

“These numbers are not going to match the bitcoin ETF inflows, and there are some structural differences in the product that just make it less attractive overall,” Lubka said.