The price of both Bitcoin and Ethereum have experienced significant surges since the advent of spot Bitcoin ETFs, which became a major point of discussion last fall. These ETFs have since proven to be a resounding success, with the total cumulative ETF flow reaching $12.3 billion as of yesterday, as reported by Farside. Almost instantaneously after the launch, which occurred on January 11th when the spot BTC ETFs began trading, attention shifted towards Ethereum and the potential for spot Ether ETFs. However, the likelihood of the SEC approving spot ETH ETFs in May appears bleak.
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In terms of progress towards approval of spot Ether ETFs, the most promising development was a tweet from James Seyffart on April 1st. He claimed that there was a 99% chance of approval for spot Ethereum ETFs, a statement that was later revealed to be an April Fool’s joke.
Balchunas and Seyffart have been frequent references in our articles. Initially, Balchunas estimated a 70% chance of approval for the spot Ethereum ETFs. However, he has since revised this figure downwards to 35%, and currently places the odds at 25% (or lower) for approval on the 23rd of May which is the deadline.
A key factor complicating the spot ETH ETF process is the classification of Ethereum. While Bitcoin is considered a commodity, the SEC appears to be leaning towards classifying Ethereum as a security. If Ethereum is indeed deemed a security, it would be subject to securities laws and face stringent regulation similar to that imposed on stocks and bonds. This would grant the SEC greater regulatory control over Ethereum and could establish a precedent for the future classification of other cryptocurrencies.
Bitcoin, classified as a commodity, does not meet the criteria of “The Howey Test”, which determines the requirements for “investment contracts” and thus falls under the jurisdiction of the term “securities”. Gary Gensler, chair of the SEC, has repeatedly affirmed that Bitcoin is indeed a commodity, most recently in his statement on January 10th when the spot Bitcoin ETFs were approved.
In his statement, a crucial paragraph highlighting the distinction between BTC and other cryptocurrencies reads as follows: "Importantly, today’s Commission action is confined 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. As I’ve said in the past, and without prejudging any one crypto asset, the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws.”
The SEC appears to be scrutinising several aspects of Ethereum, such as Ethereum’s proof-of-stake model that rewards participants with a yield and their initial $18 million ICO. In late 2018, Gensler stated during an MIT course that: “Ethereum, when it was first promoted in 2014, I believe passed this test" (read: all four elements of The Howey Test).
Despite these challenges, the SEC was compelled to approve the spot Bitcoin ETF applications earlier this year due to a federal court ruling last year. The court stated that the SEC could not deny Grayscale the ability to apply to convert its trust to a spot ETF while approving similar financial products such as futures Bitcoin ETFs. Last fall, the SEC approved several Ether futures ETFs, highlighting the striking similarity between the process of BTC ETFs and ETH ETFs.
For many crypto enthusiasts, the “Howey test” is unknown territory. The Howey Test simply put is a legal foundation established by the U.S. Supreme Court, used to ascertain if a transaction constitutes an investment contract and thus requires regulation. The criterias are as follows:
1. Is it an investment of money or assets?
2. Is the investment in a common enterprise?
3. Is there reasonable expectation of profits?
4. Is it reliant on the efforts of a promoter or others?
Furthermore, “investment contracts'' are deemed securities as The Securities Act of 1933 and the Securities Exchange Act of 1934 both define securities in a similar manner. They categorize securities as specific instruments, which include “note, stock, treasury stock, security future, security-based swap, bond, debenture”, and other instruments that are classified under wider categories such as “investment contracts”.
This text is intended to inform and is not an investment recommendation.
Best regards,
Adam Jakobsen.
NBX.
