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Node Notes: What crypto ETF will they launch next?

Welcome to our new series, Node Notes, where we’re spotlighting topics from our bi-weekly research piece, The Node Ahead. If you want to read the full piece, you can check out our blog or sign up to receive The Node Ahead straight to your inbox. This edition of Node Notes is an excerpt from Node Ahead 60.

What crypto will follow in bitcoin’s footsteps as the next approved ETF?

The success of the bitcoin ETF now has many people wondering if we will see other crypto-based spot ETFs. Will we get an Ethereum ETF? What about other major tokens like Ripple and Solana? Will we have an ETF for every cryptoasset?

All eyes on Ethereum

The most likely ETF to get approved next is Ethereum for a few key reasons. First, there are already a host of Ethereum ETF applications filed with the SEC, including the same sponsors that were approved for the bitcoin ETF. Blackrock, Fidelity, Bitwise, Ark, VanEck, and Grayscale all have filed applications for an Ethereum ETF. Second, it’s by far the largest cryptoasset other than bitcoin, and it only stands to reason that the next largest token after bitcoin would be approved next. Third, bitcoin was widely agreed upon as being a commodity even by the SEC. Though the SEC has refused to publicly state that ETH is a commodity, it’s notable that the SEC did not mention ETH in any of its lawsuits against crypto exchanges. The SEC went to great lengths to single out over 60 individual cryptoassets as being securities across various lawsuits but never once included ETH. This leaves ETH with a potentially much easier path for getting an ETF approved compared to other tokens.

But the main reason an Ethereum ETF might be approved in the near future has to do with Grayscale’s win in its lawsuit with the SEC. The rationale behind the SEC denying the bitcoin ETF for nearly a decade was that it had concerns about market manipulation. In its case, Grayscale was able to prove that spot and futures bitcoin markets are 99% correlated. The SEC ran its own internal correlation analysis and came to the same conclusion. This was vital to Grayscale’s win because 1) there had been no signs of market manipulation in the bitcoin futures market, and 2) the SEC had already approved a futures bitcoin ETF. To approve a futures ETF but deny a spot ETF makes no logical sense if they are so highly correlated. Furthermore, there had been plenty of spot bitcoin ETFs that had been operating in other markets, and none of them showed any signs of market manipulation either. That’s why the judge ruled the SEC acted “arbitrarily and capriciously.” Because of Grayscale’s lawsuit, the SEC could no longer deny bitcoin ETFs based on the logic they had been using for a decade.

Well, guess what? Ethereum also has a robust, regulated futures market, which is highly correlated with its spot price. The SEC has already approved futures-based Ethereum ETFs. There are spot Ethereum ETFs operating in other markets. The SEC will not be able to deny an Ethereum ETF based on fears of market manipulation like it did for bitcoin for all those years. The Grayscale lawsuit not only paved the way for a bitcoin ETF, but it also drastically increased the odds of an Ethereum ETF approval as well. SEC commissioner Hester Pierce even publicly said that a spot Ethereum ETF won’t need a court battle to get approval. It’s precisely this reason that some analysts give Ethereum a 70% chance of approval this year.

But just because the SEC can’t deny based on fears of market manipulation doesn’t mean the SEC couldn’t deny it for other reasons. The most notable difference between BTC and ETH is that Ethereum runs on a Proof-of-Stake consensus protocol. The SEC has expressed concerns regarding Proof-of-Stake as well as the concept of earning yield by staking. It’s also worth noting that the SEC has several outstanding lawsuits with crypto exchanges over their staking services. It’s almost certain that if an ETH ETF were to be approved, staking and staking yields would not be allowed in any of the approved applications.

Given there are applications on file currently, the SEC recently announced they decided to delay any decision on an Ethereum ETF approval for now, opting to take more time to make their decision. This came as no surprise to anyone following the space as the SEC is not under any pressure to approve any of the applications yet.  That pressure won’t come until May 23, which is the deadline for the SEC to make a decision regarding Ark’s application. Similar to the bitcoin ETF, it’s unlikely the SEC would want to be seen as giving any individual applicant an advantage by approving one before the others. Ark’s deadline for its bitcoin ETF was January 10th, which turned out to be the date that the SEC approved them all. Had the SEC not done so, they would have had to deny Ark, which would have led to lawsuits. The same situation is unfolding this May. The SEC will have to make a decision, and unless they can come up with a legally justifiable reason to deny, they may just decide to approve them all at once, just like they did with the bitcoin ETF.

So, there is a high likelihood we will get an Ethereum ETF approved, perhaps as soon as this May. But what about other tokens? If ETH gets approved, does that open the floodgates for every other cryptoasset? In short, no.

The wait for more altcoin ETFs

It is extremely unlikely we will get any ETF other than Ethereum approved any time soon because none of the other cryptoassets have the pre-existing conditions that bitcoin and Ethereum have. There are no regulated futures markets in the U.S. outside of BTC and ETH. There are no futures-based ETFs for other cryptoassets in the U.S. In addition, many of the next largest candidates after BTC and ETH were named in various SEC lawsuits as securities. It’s very unlikely the SEC would sue the exchanges and then turn around and approve those very same assets they listed without requiring those assets to register with the SEC first (not that there is a way for cryptoassets to register with the SEC to begin with but that’s beside the point for this article).

It’s very likely that the SEC will work to carefully craft a precedent in the bitcoin and Ethereum approvals that allows them to retain some discretion in deciding which crypto ETFs will be allowed to enter the market. The bottom line is that there is no clear path for any asset other than ETH to be approved for a spot ETF. Maybe someday in the future, but definitely not in 2024, and unless one of the other cryptoassets is willing to take the SEC to court, not likely in 2025 either.

Disclaimer:  This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.