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In what is sure to herald a fierce new tailwind for Ethereum and the rest of the crypto sphere, the SEC is apparently angling to approve some of the first spot Ethereum ETF applications this week, which should significantly advance the ongoing financialization and mainstreaming of cryptocurrencies. What's more, the SEC is seemingly abandoning its contention that Ethereum, functioning under a Proof-of-Stake (PoS) transaction authentication mechanism, constitutes a security.
To wit, the SEC has reportedly asked Nasdaq, CBOE, and the New York Stock Exchange (NYSE) to amend their applications to list spot Ethereum ETFs, signaling that the apex financial regulator is leaning toward approving these investment vehicles. The fact that the apex financial regulator in the US wants specific changes incorporated into these applications bolsters the prospects of an eventual approval. Bear in mind that the SEC has by the end of this week to rule on the status of CBOE's application to list spot Ethereum ETFs sponsored by VanEck and ARK Investments/21Shares.
Removal of staking to be expected here imo. Bigger signal is that there's no changes to the commodity grantor trust structure and disclosures. All signs point to SEC laying down its arguments to ETH as security. https://t.co/QpmuwfqY7p
— Scott Johnsson (@SGJohnsson) May 21, 2024
What's more, the SEC is leaning toward approving these pending spot Ethereum ETF applications without changing their "commodity grantor trust" structure. This suggests that the SEC is apparently abandoning its vehement contention that Ethereum's PoS transaction authentication mechanism bestows on it an "unregistered security" status. Of course, the ETF sponsors such as Fidelity are also playing an important role in bringing about this change of heart at the SEC by ensuring that their Ether balances are not staked. While this lack of staking will diminish the appeal of these ETFs, it appears to be a necessary opportunity cost to ensure sufficient liquidity for smooth fund operations, especially as Ethereum's standard exit queue limits the number of stakers who are allowed to exit on a given day.
As a refresher, under Ethereum's PoS transaction authentication mechanism, validators lock-up or stake specific Ether balances in specialized nodes to win the chance to authenticate a particular batch of transactions, thereby receiving the transaction fee as reward. The authenticator can lose the entirety of the staked Ether if found acting in bad faith.
Do note that spot Ethereum ETFs are technically superior to their futures counterpart, which often degrade returns due to their persistent contango, a common situation where contracts for the months ahead are priced at a premium to the front-month contract, thereby leading to increasingly expensive rollovers.
ETH ETF is going to be an epic win for crypto and bring needed clarity by being:
1st proxy on crypto as a whole (web3 index)
1st PoS network (PoS accounts for 95%+ projects in crypto)
1st project with ICO fund raising
1st project with decentralized but visible ‘operator’
— Mindao (@mindaoyang) May 21, 2024
Despite the apparent lack of a staking incentive, spot Ethereum ETFs, should they win a formal approval from the SEC, will constitute a huge win for the crypto sector in general and Ethereum in particular, allowing vast pools of capital an unfettered access to Ethereum's upside volatility. This additional demand should result in superior liquidity within the Ether ecosystem, driving up activity across Ethereum's mainnet and the associated Level 2 chains. Also, the lack of staking will prevent Wall Street behemoths from controlling a critical component of Ethereum's core utility.
