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The Ethereum ETF race begins


At the tail end of the flurry of activity around spot bitcoin ETFs this summer, there were significant developments on a different, but related front: the filing of applications for the first spot Ethereum (ETH) ETF in the US.  

We think this is a strong sign that the environment in the US for regulated crypto investment products is improving and a recognition that investor demand for crypto assets is here to stay. These filings in particular point to a growing confidence in Ethereum, as well as an improving understanding of how the world’s dominant smart contract platform is creating opportunities for long-term investors. 


Why Ethereum?

First, it’s important to understand why Ethereum has created this investment demand and why these applications are being filed. Ethereum was the first network to enable smart contracts on a blockchain and these smart contracts are used to create new digital assets that can be issued and transferred over the network’s open-source approach. This allows any developer to access and use its code, which has helped it generate a strong base of supporters and serve as the foundation for many successful Ethereum-dependent applications. Ethereum’s token ether, or ETH, is used for all value-transfer functions on the network, which is why its value has grown alongside its network (more on Ethereum can be found in our Investor’s Guide to Ethereum).

The investment case for ETH has been strengthening as it has gone through major upgrades recently, and we believe will continue to strengthen as the digitalization of our economy unfolds and the tokenization or real-world assets becomes more common. As its investment thesis has evolved and improved, there has been more demand to access ETH in familiar, regulated investment products like ETFs.


What is the significance of these filings?

As we noted in a recent article on spot bitcoin ETFs, the main reason a spot ETF is so important is that it can track the price of an asset, in this case ETH, as opposed to tracking a derivative of that asset (e.g., futures). This is particularly important for investment professionals like wealth managers and financial advisors since their clients want to track the price of an asset as closely as possible and they are already familiar with the benefits of the ETF wrapper, including its liquidity, transparency, and accessibility. 

ETFs have become very popular with investors interested in accessing specific markets. There is currently over $10 trillion invested in ETFs worldwide, with more than 70% of those assets in the US. The approval of a bitcoin or ether ETF would be an important milestone and regulatory endorsement, which we believe will lead to significant interest from many large institutional investors that have yet to invest in crypto. 


What is the SEC’s role in approving an ether ETF?

There are two primary documents required for the filing of a ´33 Act ETF with the SEC—the Registration Statement (the fund’s prospectus) and the “19b-4” filing. While the ETF issuer is responsible for preparing and filing the Registration Statement, it is the responsibility of the listing exchange to prepare and file the 19b-4, a form which asks for approval of rules changes to list the ETF. The reason for this structure is rooted in the role of exchanges as self-regulatory organizations (SROs). Exchanges are required to comply with certain rules and regulations set by the SEC when listing securities like ETFs and Form 19b-4 is a part of this regulatory process.  


When will it happen?

As with the spot bitcoin ETF, it remains unclear when exactly the SEC will approve a spot ether ETF. The SEC can delay a decision on these applications for 240 days from when a filing was publicly recorded and while there are regular checkpoints that require some response from the SEC, the agency is not required to make a final decision on the application until this period has passed. The first 19b-4 filing for a spot ether ETF was on September 6, and so analysts have suggested that the first deadline will be in May 2024.


Going forward: Hurry up and wait 

Despite the uncertain timing for a spot ether ETF in the US, we are very pleased to see some progress in the US to give investors regulated access to crypto assets in the ETF wrapper. In a recent Notes from the CIO, I wrote about the generational opportunity that I believe Ethereum is offering investors at this time, and I remain optimistic that US investors will have access to this opportunity in the familiar structure of an ETF in the not-too-distant future.


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