Author: HashKey Global

Overview

With the approval of the Bitcoin spot ETF at the beginning of the year, traditional financial funds have been continuously pouring into the cryptocurrency field in the past few months. The Bitcoin spot ETF currently holds about 830,000 bitcoins, worth about $52 billion. The market has been looking for new narrative focal points, with April being the Bitcoin halving and May being the Ethereum spot ETF. As the critical date of the Ethereum spot ETF, May 23, approaches, the outlook seems to have shifted from pessimism to optimism, judging from the remarks of well-known individuals and the changes in the market. The reason is that on the morning of the 21st, Bloomberg analysts stated that the probability of the Ethereum spot ETF being approved had greatly increased to 75%, which led to a rapid rise in the cryptocurrency market, with Ethereum rising by over 20% in a single day. Here are 5 things you should know about the Ethereum spot ETF:

1) Key Date May 23

The application for the US Ethereum spot ETF was first submitted by VanEck on October 27 last year, and the SEC's decision time for the ETF application is a total of 240 days. There will be 3 public responses in between, with response intervals of 45 days, 45 days, 90 days, and 60 days. Before the SEC makes the final decision (approval or rejection), the SEC can have 3 opportunities to defer the ETF application. At the same time, the SEC has the right to approve or reject the application at any time during the decision-making process. Based on the process of approving the Bitcoin spot ETF by the SEC, the decision will be made at the final deadline of the first application for the ETF, so the final date is May 23 this year.

Source: Bloomberg Intelligence

2) Is Ethereum a Commodity or Security?

The US SEC has not clearly stated its position on whether Ethereum is a commodity or security, so the market believes this is the key to whether the Ethereum spot ETF can be approved. The following lists the positions of different regulatory agencies in the US on Ethereum.

In March 2023, Rostin Behnam, chairman of the US Commodity Futures Trading Commission (CFTC), stated in a report to the Senate Agriculture Committee that Ethereum, as the second largest cryptocurrency after Bitcoin, is a commodity. According to the Howey Test under the US securities law, if a cryptocurrency is defined as a security, it will be regulated by the SEC. Before Congress fully legislates, the CFTC is trying to firmly establish its position, hoping to win regulatory authority over Bitcoin and Ethereum.

In August 2023, a judge in the Southern District of New York in the US made a clear ruling in handling a collective lawsuit involving cryptocurrencies, stating that Ethereum is a commodity, not a security, without analyzing whether Ethereum is a commodity or security, only reaching a conclusion.

In September 2023, after Ethereum completed the merge, SEC Chairman Gary Gensler mentioned that projects and intermediaries that allow staking tokens may need to undergo the "Howey Test" to determine if they are securities, deepening market concerns about the possibility of Ethereum being subject to securities regulation after transitioning to PoS. Since then, when Gensler was asked multiple times about whether Ethereum is a security, he did not give a clear response.

3) SEC Approval Attitude

Compared to the attitude towards approving 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. Based on the SEC's postponement of the applications for the Franklin and Grayscale Ethereum spot ETFs on April 23, many analysts have speculated that there has been no constructive dialogue between the SEC and the ETF applicants, so the probability of approval on May 23 is very low.

However, on May 20, things took a turn. According to news from Bloomberg ETF analyst Eric Balchunas and Fox Business reporter Eleanor Terrett, the SEC is asking the applicants to expedite the submission of the 19b-4 document for the Ethereum spot ETF, and the sudden start of the application process immediately led the market to believe that the SEC's attitude has become positive, signaling an approval.

4) Approval Mechanism

Speaking of the signs of approval, we need to understand the entire process mechanism first. The first step is for the application document 19B-4 (exchange rule change) to comply with SEC guidelines, the second step is for the application document S-1 (registration statement) to comply with SEC guidelines, and the S-1 document may require several weeks or longer for approval. The final step is for five SEC commissioners to vote for approval. Based on the situation of the Bitcoin spot ETF, two commissioners voted in favor of cryptocurrencies, two voted against, and the final vote was cast by the SEC chairman, who voted in favor, leading to the approval of the Bitcoin spot ETF. The situation of the Ethereum spot ETF is that the first step has just started, and the subsequent situation is still uncertain. Investors should be aware of market risks.

5) Legal Battle

The market has always predicted that if the SEC rejects the application for the Ethereum spot ETF, it may face a lawsuit from the applicants. The reason is that in August last year, Grayscale won a lawsuit against the SEC, with the key to the victory being Grayscale's protest that while the SEC approved the Bitcoin futures ETF, it did not have sufficient reasons to continue rejecting the approval of GBTC's conversion to a Bitcoin spot ETF. In the end, the judge ruled that the reasons for the SEC's rejection were arbitrary and capricious, as the SEC failed to explain the differential treatment of similar products. Therefore, the market believes that Grayscale's legal victory has provided a basis for future cases. If the Ethereum spot ETF is rejected again, the issuer can refer to this case to file a lawsuit, and the SEC still faces a high risk of losing the lawsuit.

*In October 2023, the SEC approved 9 Ethereum futures ETFs for trading on the US market.

Conclusion

With two days left until the 23rd, the SEC's attitude has shifted from negative to positive, and the confidence in the cryptocurrency market has increased significantly, with Ethereum rising by 20% in a single day. However, from an objective perspective, the subsequent procedures involving the S-1 document and commissioner voting are still uncertain, and investors should be aware 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 seems to have turned from pessimism to optimism.

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