The U.S. SEC makes a 180-degree turn, and the approval of the Ethereum spot ETF marks a key moment

Author: Nianqing, ChainCatcher

This morning, news revealed that the U.S. Securities and Exchange Commission (SEC) has requested exchanges to expedite the update of their 19b-4 applications. Bloomberg ETF analysts Eric Balchunas and James Seyffart raised the probability of approval for the spot Ethereum ETF from 25% to 75% following related rumors, and later clarified that the 75% specifically refers to the approval probability of the 19b-4.

Affected by this news, the price of ETH quickly broke through $3600, peaking at $3693, with a 24-hour increase of over 19%.

Sudden Progress or SEC's "Stalling Tactic" in Response to Political Situation

According to CoinDesk, three insiders stated that the SEC has requested exchanges to expedite the update of their 19b-4 applications, indicating that it may approve the related applications before the critical deadline (May 23). A company currently negotiating with the SEC also mentioned that the SEC had been dragging its feet a few weeks ago, but is now finally on track for approval.

However, it is important to note that this does not mean the ETF will be approved. Potential issuers still need to have their S-1 applications approved before the product can begin trading. The SEC may take an indefinite amount of time to approve S-1 documents, as there is no deadline.

Bloomberg Intelligence ETF analysts Eric Balchunas and James Seyffart raised the probability of approval for the spot Ethereum ETF from 25% to 75% upon hearing news that the SEC might take a more favorable stance on the applications. However, Eric Balchunas later emphasized that the 75% probability only pertains to the May 23 deadline for the 19b-4 (VanEck's deadline), and the applicant still needs S-1 approval, which could take weeks to months before the actual Ethereum ETF goes live.

It is understood that the 19b-4 document is a filing submitted by exchanges, typically related to changes in the rules governing exchange operations, such as introducing new products, modifying trading mechanisms, or other related exchange policies. Once submitted, the SEC reviews the proposal, solicits public comments, and then decides whether to approve it; the S-1 document is a registration statement that a company must submit before publicly offering its stock. This document thoroughly discloses key information about the issuing company's financial condition, operational status, market environment, initial pricing of the stock, and risk factors.

Eric Balchunas also hinted in related tweets that the SEC's sudden 180-degree turn on the Ethereum spot ETF may stem from the increasingly pressing "political issues."

ChainCatcher previously reported that Donald Trump expressed a desire to keep cryptocurrency businesses in the U.S. and start accepting campaign donations in cryptocurrency. He essentially promised that if he returns to the White House in the upcoming election, he would be a president supportive of cryptocurrency. Subsequently, 12 Democratic senators in the U.S. passed a resolution last week with Republicans to overturn the SEC's Staff Accounting Bulletin (SAB) 121. This move may indicate that more Democrats wish to win the favor of cryptocurrency-supporting voters, similar to Republicans historically.

The 2024 U.S. presidential election will be held on November 5. Therefore, in the current unclear situation, the SEC's request for exchanges to expedite the update of their 19b-4 applications is likely to first approve the related agency's 19b-4 applications, and then slowly approve the S-1 documents, as this approval does not have a final deadline like the 19b-4. Thus, this move appears more like the SEC's "stalling tactic."

Multiple Review Decisions Previously Delayed Until Final Deadline

Previously, the SEC had repeatedly delayed the decision time for several Ethereum spot ETFs.

On May 7, the SEC postponed its decision on the Invesco Galaxy Ethereum spot ETF to July 5, 2024, stating, "It is appropriate to designate a longer period to issue an order approving or disapproving the proposed rule change to allow sufficient time to consider the proposed rule change and the issues raised therein."

In the past two months, the SEC has delayed decisions on Ethereum spot ETFs from institutions such as Fidelity, Hashdex Nasdaq, ARK 21Shares, Grayscale, Franklin Templeton, VanEck, and BlackRock. All ETF reviews have been postponed until after May 23.

It is understood that the Ethereum spot ETF has four review deadlines (45 days, 45 days, 90 days, and 60 days). Once an institution submits a new ETF application, the SEC will register the application in the federal register, and from the day of registration, the 240-day cycle begins. At each stage's deadline, the SEC must respond: approve, deny, or delay the review. If the first date does not yield a decision, it will be postponed to the second, until it is delayed to the final deadline, at which point the SEC must make a final decision. In other words, the final deadline of May 23 for the earliest applicant, the VanEck Ethereum spot ETF, will be a key date, and the decision will directly impact the resolution of other applications.

Currently, seven entities are applying for the Ethereum ETF, namely: BlackRock, Fidelity, Invesco & Galaxy, Grayscale, VanEck, 21Shares & Ark, and Hashdex. The approval deadlines for each fund at the SEC are shown in the table below:

If the SEC denies the 19b-4 filing approval for the VanEck spot Ethereum ETF on May 23, the issuer will need to resubmit the documents, thus restarting the 240-day application cycle, which may lead to approval in the fourth quarter of this year or early 2025.

Some lawyers have stated that if the issuer rejects the planned Ethereum product, they may sue the SEC, as previous court rulings ultimately facilitated the trading of the U.S. spot Bitcoin ETF.

"Ethereum Spot ETF Still Carries Certain Risks"

The SEC and several analytical institutions have stated that compared to the already listed Bitcoin spot ETFs, the Ethereum spot ETF still carries certain "risks." In public documents, the SEC has emphasized the negative impacts of Ethereum's PoS mechanism, price manipulation risks, and securitization risks.

Fineqia International analyst Matteo Greco stated in a research report on Monday that concerns about the liquidity of the ETH spot and futures markets, as well as previous concerns about the SEC classifying Ethereum as a security, have raised doubts about the rapid approval of ETH.

Additionally, in recent months, the SEC has lacked engagement with potential issuers, which is different from the multiple meetings the regulatory agency held with fund companies before approving Bitcoin spot ETFs.

However, more industry insiders believe that the approval of the Ethereum spot ETF is just a matter of time. Ophelia Snyder, president of 21Shares, previously stated that the applications for Ethereum are not much different from those for Bitcoin. They have the same structure, the same custodians, and the same disclosure information. Both are highly consistent in their internal structures.

At the end of April, several institutions in Hong Kong received approval from the Securities and Futures Commission for their Ethereum spot ETFs and listed them. Although the current scale is limited, it is still a key step in cryptocurrency regulation and provides some reference for the approval of U.S. Ethereum spot ETFs.