Spot Ether ETFs more significant than BTC ETFs for the broader cryptos industry –

The approval of the first spot Bitcoin (BTC) exchange-traded fund (ETF) in the U.S. marked a historic day for the cryptocurrency ecosystem as it brought greater legitimacy to the asset class, opened the door for the trillions in funds held by institutions to flow into cryptocurrencies, and paved the way for other digital assets to be listed as ETFs. 

While it is highly unlikely that the vast majority of tokens would ever gain ETF approval, certain projects have a better chance than others, including Ethereum (ETH), the second-ranked crypto by market capitalization and the top smart contract platform. 

Previous statements by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have indicated that they view Ether as a commodity – giving it a higher chance of approval – but issues related to Ether staking suggest to some that it behaves more like a security, which makes the approval of a spot ETH ETF more of a challenge. 

“Staking, as well as smart contract functionality, is one of the main differentiators between tokens like Ethereum and store-of-value tokens like Bitcoin,” said Markus Levin, co-founder of XYO. “The main question the SEC will have to answer is whether these functions prohibit tokens from becoming an ETF.”

“Post-approval, the option to stake will introduce an interesting market dynamic pitting profits against convenience,” he added. “While certain investors may opt for holding and staking real Ether to gain yields and participate in network activities, an ETF offers a more convenient and liquid alternative to holders who do not care too much about the decentralization part.”

Levin said that the Bitcoin ETF hype helped BTC price surge higher while ETH lagged behind, but expects Ether to play catch-up as the hype around an ETH ETF starts to build. 

“Ethereum has been lagging behind Bitcoin and altcoins such as Solana for months. The approval has the potential to propel Ethereum forward, rekindling mainstream interest and serving as a pivotal moment for the cryptocurrency,” he said. “It could breathe new life into Ethereum’s market position, fostering increased confidence among investors and reinstating its prominence as a key and influential player in the digital asset space.”

While the ETF talk has focused on Bitcoin, Levin said that the approval of an Ether ETF would mark a sea change for the industry and could usher in a new era for digital assets.

“The green light for Ethereum ETFs could set off a chain reaction, generating heightened interest and demand for other notable altcoins,” he said. “This phenomenon has the potential to reshape the dynamics of the entire cryptocurrency market.”

Levin said the approval of an ETH ETF would indicate a greater level of “regulatory acceptance and deeper integration into conventional finance.” He suggested this would “play a role in the maturation and broader acceptance of the cryptocurrency market,” as it would “enhance confidence, entice greater participation from institutional investors, and open avenues for additional financial products related to crypto.” 

“Approval could open the floodgates for most highly liquid cryptocurrencies, such as Solana, or even Layer-2s like Polygon, to receive ETFs, alleviating concerns that staking and smart contract functionality bar networks from receiving ETF approval,” Levin said. “It would force the SEC and Congress to finally provide clear guidance on the definition of a digital security.”

“An Ethereum ETF would likely have a greater impact on the crypto industry as a whole compared to a Bitcoin ETF,” said Navin Vethanayagam, “chief brain” at IQ.wiki. 

“From an investor’s perspective, the Ethereum ecosystem offers a broader array of opportunities compared to Bitcoin,” he said. “For example, liquid staking, a distinct feature of Ethereum enables even greater returns for investors as staked Ether by participating institutions through the ETF will generate additional yield (over and above the shifts in Ether’s price). Liquid staking tokens would be made available through this process which will enable participants to utilize those tokens to leverage a wide array of investment opportunities through financial applications in Ethereum.”

“While crypto enthusiasts often view Bitcoin and Ethereum as close competitors, the reality is that mainstream awareness and interest in Bitcoin outweigh Ethereum by a significant margin,” Vethanayagam said. “Therefore, this approval of Bitcoin ETF is an important milestone to catalyze a new wave of new investors who are currently more familiar with Bitcoin, to venture into the Ethereum ecosystem and benefit from a wider range of investment opportunities available there.”

Likelihood of approval 

While many have assumed that the approval of a spot BTC ETF will automatically lead to the approval of a spot ETH ETF, nothing is certain in crypto as regulators have taken a hard-nosed approach to the asset class. 

“There are significant differences between Ethereum and Bitcoin that may not be apparent to the average investor,” said Slater Heil, founder and CEO of Composable Corp. “Bitcoin has achieved true decentralization, lacking a prominent thought leader and featuring a dispersed group of, frankly, underfunded developers without a singular mission. It operates as an extremely decentralized system, and Ethereum faces similar arguments in this regard.” 

“If we delve into the security versus commodity debate, Bitcoin appears unequivocally as a commodity, essentially a derivative of energy,” he said. “In contrast, Ethereum operates as a computer platform competing with others to provide superior services. Ideally, we would live in a world where achieving a common enterprise and effort for a project ensures it’s not classified as a security once sufficient decentralization is attained.”

“The critical factor here is ‘decentralization.’ The verdict depends on whether Congress and the SEC can agree on whether sufficient decentralization exempts an asset from being labeled a security,” Heil said. “Additionally, the regulatory framework needs to accommodate the permissionless nature of these networks, a hurdle Bitcoin has already overcome. Ethereum has reached that point, with the SEC not pursuing a security case against it. This positions Ethereum for likely classification as a commodity, smoothing the ETF application process.”

“However, the journey involves navigating numerous risks and challenges for Ethereum ETFs, making the upcoming year particularly interesting,” he warned. “If Ethereum ETFs gain approval, it will set off a domino effect, prompting other crypto assets to pursue similar paths. This rush could lead to increased clarity on which crypto assets fit within this system and which do not, benefitting the entire industry.”

“It’s difficult to put a number on it, however, I’ve seen the likelihood of approval this May pegged at 70%. That strikes me as optimistic, I would put it around 50/50 today,” said Seth Hertlein, head of policy at Ledger. 

“The case for approval runs like this: The SEC has previously approved ETH futures ETFs and the Grayscale Court ruled that BTC futures ETFs were legally indistinguishable from BTC spot ETFs, therefore, the SEC had to approve BTC spot ETFs,” he said. “Applying the same logic, the SEC must also approve ETH spot ETFs because they’ve already approved ETH futures ETFs. But keep in mind, the SEC only approved the BTC spot ETFs in response to a court order, and even then, two of the Democrats on the Commission were still willing to defy the court!”

“In the case of ETH ETFs, while the holding of the Grayscale decision is analogous, there is no court order, as yet, forcing the SEC to approve, and the current Commission has proven that it’s perfectly willing to be obstructionist to the bitter end,”…