Ethereum supporters are betting that their token will be next to receive exchange-traded fund (ETF) approval in the United States, while BTC developers are already counting the cash they will receive from ETF issuers.
Following this week’s begrudging approval of BTC spot-based ETFs by the U.S. Securities and Exchange Commission (SEC), Ethereum supporters are expecting similar approvals for their ETH token later this spring. Multiple applications have already been filed for ETH-based ETFs, including by tradfi giant BlackRock, whose mid-2023 application for a BTC ETF was said to have helped bring critical mass to that effort.
The first hard deadline the SEC faces for approving or rejecting these ETH-ETF applications is May 23, the date by which the SEC is required to weigh in on the application by Cathie Wood’s ARK 21Shares.
Two other applications—Hashdex and VanEck—are also expecting answers in the final week of May, while Digital Currency Group (DCG) subsidiary Grayscale Investments‘ application to convert its futures-based Grayscale Ethereum Trust to a spot-based ETF comes due in mid-June. Three other applications, including BlackRock’s, follow suit not long thereafter, and more applications will undoubtedly be filed in the interim.
Like BTC, the ETH token’s fiat value has been on a tear over the past 12 months, driven partly by the ETF hype. But several notes of caution are being sounded, including the fact that BTC’s fiat price has so far reacted to the ETF news like a limp noodle rather than a rocket ship. In the short-term, ETH’s price has enjoyed a larger percentage increase than BTC, likely because the ETH-ETF approval is still a hypothetical that need not reflect reality.
That reality includes SEC chair Gary Gensler’s public statement that the BTC ETF approval “should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities.” And make no mistake about it, Gensler believes ETH is an unregistered security—as does New York’s Attorney General—particularly after its controversial shift from a consensus mechanism based on proof-of-work to one based on proof-of-stake (PoS).
Ethereum’s transition to PoS was widely criticized in advance for the obvious way in which it would further concentrate power in the hands of a relative handful of ETH whales who serve as the protocol’s transaction validators. Combine that with the fact that many of these same whales were insiders who obtained buckets of ETH during the protocol’s
controversial premine, and you have a recipe for centralization.
As Gensler told reporters last March, individuals “locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing,” were “investing anticipating a return,” thereby ticking the boxes on the Howey test for identifying securities that require registering with the SEC.
Gensler may have felt his hands were tied regarding the BTC ETF approval due to last summer’s federal appeals court order rejecting the SEC’s rejections of Grayscale’s bid to convert GBTC from futures-based to spot-based. But Gensler has been far more vocal in tagging ETH as a security than he was with BTC.
Moreover, the SEC’s BTC ETF vote was a nailbiter, with Gensler breaking the 2-2 tie (split neatly between Democrat opposition and Republican approval). A future vote on the ETH ETF isn’t likely to draw a similar resignation from Gensler, at least not without some federal court order forcing his hand. Gensler will remain SEC chairman for at least the next 12 months, so this pie will likely remain in the sky for at least that long.
ETFFS
On the day following the BTC ETF approval, the BTC token enjoyed a brief spike in value as the markets opened in New York. But, in an Icarus-worthy swoon, the price quickly crashed back down to earth and remains largely unchanged from Wednesday at the time of writing.
While some of the 10 ETFs that launched Thursday enjoyed respectable trading volume, their share prices also swiftly retreated following the early morning euphoria. Blackrock’s ETF closed the day down nearly 5%, while Ark 21Shares fell nearly 7%, with most of the rest somewhere in between.
Grayscale proved the exception, finishing effectively flat from the opening bell. Most of GBTC’s $2.2 billion in trading volume—nearly half of Thursday’s total for all 10 ETFs—was likely on the sell side, reflecting the fact that (a) Grayscale had long prevented GBTC holders from redeeming their shares, (b) GBTC is charging the highest ETF management fees, and (c) people really hate Barry Silbert.
As the day went on, some individuals reported that their attempts to purchase these ETF shares via their Vanguard brokerage accounts were rejected. The Block quoted a Vanguard spokesperson saying the company had no plans to offer BTC ETFs to its customers due to its belief that BTC’s “high volatility runs counter to our goal of helping investors generate positive real returns over the long term.”
Merrill Lynch also reportedly blocked its customers from plucking this formerly forbidden fruit, although the company stated it was adopting a wait-and-see approach before making any final decision. Reuters quoted a Goldman Sachs investment officer saying, “we don’t think it is an asset class to invest in.”
BTC maximalists cried foul at these announcements, ignoring the ironic clash with their previous declarations that the mighty BTC required no permission from Wall Street to disrupt finance. Honestly, it’s like every day maxis wake up with their memory wiped, embracing whatever narrative suits their immediate purpose, only to discard that when the sun rises the next day. What, Christmas again? Ho ho ho!
BTCha-ching!
Time will tell whether Goldman/Merrill/Vanguard are in the right, but one group is already celebrating the ETF debuts: BTC Core developers, who have been promised a share in the profits of at least two of the ETFs that launched this week.
On January 10, Bitwise declared that it would “donate 10% of the profits” of its BITB ETF to three organizations dedicated to BTC open-source development: Brink, OpenSats, and the Human Rights Foundation (HRF). Bitwise said the donations “have no strings attached and will be made annually for at least the next 10 years.”
The HRF might seem the odd man out in that trio above, but the organization launched a Bitcoin Development Fund in 2020 aimed at supporting developers in making BTC “more private, decentralized and resilient” to better serve the financial needs of human rights activists/organizations around the world.
Bitwise’s move followed last week’s announcement by VanEck that it would donate five percent of its ETF profits to support the “Bitcoin Core devs” at Brink “for at least 10 years.”
Critics were quick to pile on to these announcements, claiming it was further evidence that BTC’s future development was being ‘captured’ by Wall Street. And it is hard to see how this generosity wouldn’t allow Bitwise and VanEck some influence over future decisions regarding potential revisions to the BTC protocol.
Remember, BTC Core devs were responsible for the controversial changes imposed on the original Bitcoin protocol that effectively eliminated its ability to serve as the peer-to-peer electronic cash system described in Satoshi Nakamoto’s 2008 white paper. The technology that resulted from these changes (BTC) is infinitely more suited to its current role as ‘digital gold,’ aka the kind of product around which an ETF might be built.
Assurances that BTC will remain a function-free gold brick would likely be of great comfort to, say, a company that had invested time, money, and effort in setting up a BTC spot-based ETF. BTC Core devs will also sleep easier knowing that they have the cash they need to maintain control of that neutered protocol. Everybody—with the possible exception of society at large—wins!
Last year, VanEck made a similar profit-sharing promise to Ethereum developers in the event that the SEC okays ETH-based ETFs. VanEck reasoned at the time that “if TradFi stands to gain from the efforts of Ethereum’s core contributors, it makes sense that we also give back to their work.” (Emphasis added.)
At this point, we remind everyone that the Howey test states that an investment contract exists when there is “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Your move, Gary.
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