Ethereum ETFs: Will the SEC Approve Them Next?

The approval of eleven spot Bitcoin ETFs in January 2024 marked a historic shift in the financial world. Giants like BlackRock and Fidelity successfully bridged the gap between traditional finance and cryptocurrency. Now, the eyes of the market have turned to the second-largest cryptocurrency by market capitalization. Investors and institutions are asking the same question: Is a spot Ethereum ETF next in line, or will regulatory hurdles halt the momentum?

The Precedent Set by Bitcoin

To understand the likelihood of an Ethereum (ETH) approval, you have to look at how Bitcoin (BTC) succeeded. The Securities and Exchange Commission (SEC) did not approve spot Bitcoin ETFs willingly. They were effectively forced to do so after a federal court ruled against them in a lawsuit brought by Grayscale Investments.

The court’s logic was simple but powerful: The SEC had already approved Bitcoin futures ETFs. Because the spot market and the futures market for Bitcoin are highly correlated (meaning they move in price together), the court ruled it was “arbitrary and capricious” to approve one but deny the other.

This is the primary argument for Ethereum ETFs. The SEC has already approved Ethereum futures ETFs (proshares, VanEck, and Bitwise launched these in late 2023). Applicants argue that if the correlation argument held for Bitcoin, it legally must hold for Ethereum as well.

The Key Applicants and Deadlines

Several major financial institutions have filed paperwork (Form 19b-4 and Form S-1) to list spot Ethereum ETFs. The SEC has delayed these applications multiple times, pushing them to their final deadlines.

The most critical date to watch is May 23, 2024.

This is the final statutory deadline for the VanEck Ethereum ETF application. Why does VanEck’s deadline matter for everyone else? When the SEC approved Bitcoin ETFs, they approved all qualified applicants simultaneously to avoid giving any single company a “first-mover” advantage. If the SEC plans to approve Ethereum ETFs, they will likely do so in a batch on or before May 23.

Current Active Applicants Include:

  • BlackRock (iShares Ethereum Trust): The world’s largest asset manager.
  • Fidelity (Fidelity Ethereum Fund): A massive player in retail investment.
  • Grayscale: Seeking to convert their existing Ethereum Trust (ETHE) into a spot ETF.
  • Ark 21Shares: A collaboration between Cathie Wood’s Ark Invest and 21Shares.
  • Franklin Templeton, Invesco/Galaxy, and Hashdex.

Why Approval Is Not Guaranteed

Despite the legal precedent, the mood among analysts has shifted from optimistic to skeptical over the last few months. Bloomberg Intelligence analysts Eric Balchunas and James Seyffart, who correctly predicted the Bitcoin ETF approval, lowered their odds of an ETH approval in May from 70% down to 25% (and potentially lower).

Here are the specific obstacles threatening the approval:

1. The “Radio Silence” Problem

During the Bitcoin ETF process, the SEC engaged in a back-and-forth dialogue with issuers. They sent comments on S-1 filings, asked for specific amendments, and held meetings weeks before the deadline.

For Ethereum, issuers have reported a distinct lack of engagement. The SEC has not provided the same level of detailed feedback. This “radio silence” suggests the agency might be preparing a rejection rather than an approval.

2. The Proof-of-Stake Complication

Bitcoin uses a “Proof-of-Work” mechanism, similar to mining gold. Ethereum uses “Proof-of-Stake,” where holders can lock up their tokens to earn yield. This staking feature complicates the regulatory view.

The SEC, led by Chair Gary Gensler, has hinted that “staking” services might constitute an investment contract, which would classify Ethereum (or at least the staking aspect of it) as a security, not a commodity. If the SEC labels ETH a security, it falls under a completely different, much stricter set of laws than Bitcoin.

Strategic Pivot: To combat this, applicants like Ark 21Shares and Fidelity recently amended their filings to remove staking rewards. They effectively promised not to stake the Ethereum held in the trust. This creates a “plain vanilla” ETF product to try and appease regulators.

3. The Consensys Lawsuit

In April 2024, software company Consensys filed a lawsuit against the SEC. The lawsuit alleges that the SEC has been secretly building a case to classify Ethereum as a security for over a year. If the SEC officially declares ETH a security, it would almost certainly result in the immediate rejection of all spot ETF applications until the courts resolve the status of the asset.

What Happens If The SEC Says No?

If the May 23 deadline passes with a rejection, the battle is likely to move back to the courtroom.

  • Immediate Market Reaction: A rejection is partially priced in, but it would still likely cause short-term volatility for the price of ETH. The discount on the Grayscale Ethereum Trust (ETHE) might widen.
  • Litigation: Issuers generally have deep pockets. If the SEC rejects the applications based on reasoning that contradicts the previous court ruling regarding futures/spot correlation, issuers will likely sue.
  • Delay: A lawsuit would drag the process out for another 12 to 18 months.

Summary of Probabilities

While the legal arguments for approval are strong, the political and regulatory environment is hostile. The lack of constructive conversation between the SEC and the issuers is the strongest signal of a pending delay or denial.

  • Bull Case: The SEC approves the “staking-free” versions of the ETFs on May 23 to avoid another losing lawsuit.
  • Bear Case: The SEC denies the applications based on concerns over market manipulation or classifies ETH as a security, forcing a long legal battle.

Frequently Asked Questions

What is the difference between a Spot ETF and a Futures ETF? A Futures ETF holds contracts that bet on the future price of Ethereum. A Spot ETF actually holds the Ethereum tokens in a digital vault (custody). Spot ETFs generally track the price of the asset more accurately and are preferred by long-term investors.

Who is the custodian for these ETFs? Most applicants, including BlackRock and Franklin Templeton, have listed Coinbase as the custodian who will actually hold the Ethereum. Fidelity plans to use its own digital asset arm for custody.

Will the price of Ethereum go up if approved? While impossible to predict with certainty, Bitcoin rallied significantly in the months leading up to and following its ETF approval. An ETF makes it easier for pension funds, wealth managers, and advisors to buy ETH, potentially bringing billions of dollars in new demand.

Does Gary Gensler think Ethereum is a security? Gary Gensler has refused to give a direct “yes” or “no” answer in Congressional hearings. However, he has stated generally that most crypto tokens other than Bitcoin have characteristics of securities.