The U.S. Securities and Exchange Commission (SEC) may have a major turnaround in its stance and approve an Ethereum spot ETF, causing the price of Ethereum to surge over 20% today. Alex Thorn, Head of Research at Galaxy Digital, analyzed that if the rumors of the SEC’s change in attitude are true, the SEC will determine that Ethereum itself is not a security, but pledged Ethereum is a security.
If pledged Ethereum becomes a security, what will happen to the ecosystem?
The key moment for the SEC’s approval of the Ethereum spot ETF is set to take place this week on the 23rd, when the SEC needs to make the final decision on the applications from VanEck, Ark/21Shares (on the 23rd and 24th respectively), and the final decision on Grayscale’s application will need to be made by the 30th.
Originally, the market widely expected the SEC to reject the relevant applications, but Bloomberg ETF analyst Eric Balchunas made a major reversal in attitude this morning, increasing the approval probability from 25% to 75%, causing Ethereum to surge over 20% and surpass the $3,700 mark.
However, it should be noted that another analyst, James Seyffart, also added that the probability increase to 75% applies to the 19b-4 rule (exchange rule change), and approval of the S-1 (registration statement) application will be needed in the future to officially see Ethereum spot ETF trading, which may take a few weeks to a few months.
Regarding the possibility of the SEC approving the Ethereum spot ETF, Alex Thorn, Head of Research at Galaxy Digital, shared his analysis:
Although it is not necessarily the case as speculated by the Head of Research at Galaxy Digital, providing collateral will turn it into a security. But if the situation really turns out that way, then Lido, which currently has a TVL of up to $35 billion, and the recently popular decentralized collateral protocol EigenLayer may face severe regulatory challenges.
Furthermore, Ethereum’s consensus mechanism has already transitioned to PoS. If the act of collateralization truly turns ETH into a security, it could bring significant changes to the current network security mechanism… which requires our continuous attention.
So far, the SEC has not explicitly determined whether Ethereum is a security or a commodity. Scott Johnsson, General Partner at Van Buren Capital, previously pointed out that on March 8th, when the SEC conducted an inquiry into BlackRock’s Ethereum spot ETF application, it was still considering this issue.
In the document, the SEC asked Nasdaq Stock Market whether they “considered the nature of the underlying assets held by the trust” and whether the argument supporting the listing of a Bitcoin spot ETF applies to Ethereum, given its PoS mechanism and limited control by a few individuals or entities.
Richard Kerr, Partner at K&L Gates, stated that the Ethereum spot ETF is a product based on the 1933 Securities Act and commodities. If Ether is deemed a security, the issuer will not be allowed to trade it under that name.
In fact, the SEC’s failure to clearly state whether Ethereum is a security has caused dissatisfaction among 48 U.S. Congress members. They jointly sent a letter to Gary Gensler in March, requesting clarification on whether Ethereum is considered a security and whether the plan by Prometheum, a digital asset securities special purpose broker-dealer, to offer ETH custody services is in violation.
Regardless of whether it is approved or not, several industry observers have previously stated that the SEC is unlikely to allow ETFs to pledge the ETH they hold. Ark Invest and 21 Shares previously stated that their ETF plans would pledge the ETH they hold, but their updated S-1 filing on May 10th did not include such wording.
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