DeTings: Is there still hope for the Ethereum spot ETF?

Author: Sima Linwei, Editor-in-Chief of DeThings

On May 8, the world's largest Bitcoin asset management firm Grayscale withdrew its 19b-4 application for an Ethereum futures ETF, just three weeks before the securities regulator was forced to make a decision. Grayscale initially submitted the 19b-4 application for the Ethereum futures ETF on September 19, 2023, and if approved, the ETF would be listed on the New York Stock Exchange.

According to DL News, Grayscale CEO Michael Sonnenshein responded at an event in London hosted by the Financial Times on Wednesday, stating that the company will focus on converting its Ethereum trust into a spot ETF product.
Sonnenshein said, "The asset management firm is withdrawing the application because many futures products are already available for investors, and sometimes we apply for products, which does not necessarily mean they will enter the market."

The SEC, which holds the review rights for the Ethereum ETF, remains ambiguous in its stance. On May 7, U.S. SEC Chairman Gary Gensler, in an interview with CNBC, maintained a negative attitude towards cryptocurrencies. In his view, the SEC oversees assets exceeding $100 trillion, of which cryptocurrencies account for only a small portion, but the issues of investor fraud in this field are quite serious. When pressed by reporters about the Ethereum ETF, he stated that it requires committee evaluation. As of now, the committee must make a decision on VanEck's application by May 23, while the final deadlines for ARK 21 Shares and Hashdex are May 24 and May 30, respectively.

Since cryptocurrencies have emerged from the shadow of the 2022 FTX collapse, a new bull market led by Bitcoin has begun. Bitcoin's price officially broke its historical high on March 5, reaching nearly $73,000 at one point. However, as the second-largest cryptocurrency, Ethereum's upward momentum has not been as "promising" as Bitcoin's.

As of the time of writing, Ethereum's price hovers around $3,000, nearly doubling from its bear market low, but still far from its historical high of $4,800. In this context, whether the Ethereum spot ETF can be approved has become a significant positive bet for cryptocurrency investors.

However, with Grayscale withdrawing its futures ETF and the U.S. SEC remaining silent, JPMorgan has also stated that the likelihood of Ethereum ETF approval in May is still less than 50%. So what factors are hindering the approval of the Ethereum spot ETF? Can Ethereum also experience a "Wall Street institutional bull" like Bitcoin?

The author believes that the following three key factors will dominate the fate of the Ethereum spot ETF. They are the PoS consensus mechanism, the influence of the Ethereum Foundation and its founder, and the 2024 U.S. presidential election.

Will PoS Pass the Howey Test?

As one of the most influential blockchain networks, Ethereum's transition of its consensus mechanism has attracted widespread attention. Years ago, Ethereum chose to shift from a PoW mechanism to PoS. Some argue that the PoS consensus mechanism is a more environmentally friendly and sustainable alternative to PoW, as it determines the validating nodes in the network based on the number of tokens held. However, despite its theoretical advantages, there are still many uncertainties regarding its practical performance.

For example, the PoS consensus mechanism may face challenges related to forking and governance. In a PoS network, validating nodes that hold a large number of tokens have more governance power, which may lead to centralization of power and unfairness in governance decisions. Additionally, forking could become an issue, as validating nodes with substantial token holdings may tend to support their own interests rather than the overall interests of the network.

The Howey Test is one of the standards used by the U.S. Securities and Exchange Commission (SEC) to determine whether a crypto asset qualifies as a security. In this test, the SEC evaluates various characteristics of the crypto asset, including the stability and security of its consensus mechanism. Ethereum's PoS consensus mechanism will be under particular scrutiny, as its security and stability as an important public blockchain network have far-reaching implications for the market.

There are many controversies and questions regarding whether the PoS consensus mechanism can pass the Howey Test. On one hand, the theoretical advantages of the PoS mechanism, such as higher energy efficiency and stronger network security, may support its passing the Howey Test. On the other hand, the practical application of the PoS mechanism is still in its early stages, and the security challenges and risks it faces have not been fully validated. Particularly regarding economic incentive mechanisms like Ethereum Staking rewards, the PoS consensus mechanism may face more regulatory scrutiny and challenges. Therefore, whether the PoS consensus mechanism can pass the Howey Test will be one of the key factors influencing the approval of the Ethereum spot ETF.

Influence of the Ethereum Foundation and Vitalik Buterin

Meanwhile, the Ethereum Foundation and its founder Vitalik Buterin, as core components of the Ethereum ecosystem, have a significant influence on Ethereum itself. This influence is reflected not only in technical development and network governance but also directly affects market recognition of Ethereum and investor confidence in it.

First, the Ethereum Foundation, as the main organization promoting the development of the Ethereum ecosystem, provides a solid foundation for Ethereum's growth through funding support and technical advancement. The foundation's financial backing allows the Ethereum network to continuously innovate and upgrade, maintaining its leading position in the blockchain field. Additionally, the foundation promotes the healthy development of the Ethereum ecosystem through various activities and projects, such as the Ethereum Community Fund and Ecosystem Development Fund.

Second, as the founder of Ethereum, Vitalik Buterin is regarded as the spiritual leader and technical pioneer of the Ethereum community. His statements and views have a direct impact on the market, and his presence on social media often leads to significant market fluctuations. Investors and market participants tend to closely monitor Vitalik's updates to understand his views and expectations regarding Ethereum's future development.

However, this influence also raises concerns for regulatory agencies. Regulators may worry that the influence of the Ethereum Foundation and Vitalik could be used to manipulate the market, especially concerning financial products like the Ethereum ETF. They may be concerned that the actions and statements of the foundation and Vitalik could affect the stability of Ethereum's price and the fairness of the market, making them reluctant to approve financial products like the Ethereum ETF.

2024 U.S. Presidential Election

Finally, in the 2024 U.S. presidential election, Trump and Biden will once again be the main contenders, and their differing political positions and attitudes will directly influence regulatory agencies' attitudes and policies towards the cryptocurrency market.

The Trump administration demonstrated a tendency to support market freedom and innovation during its tenure. Trump himself has publicly expressed support for the development of blockchain technology and digital currencies, believing they can create new opportunities for economic growth and job creation. Under his leadership, regulatory agencies may be more inclined to adopt a relatively lenient stance, supporting the development and innovation of the cryptocurrency market. This position may manifest as relatively relaxed regulatory policies, more regulatory sandbox programs, and cautious regulation of new crypto assets rather than strict restrictions.

In contrast, the Biden administration tends to place greater emphasis on the stability of financial markets and the protection of investors. Biden and his team may focus more on the risks and uncertainties of the cryptocurrency market and adopt more cautious and stringent regulatory measures to ensure market stability and transparency. This could include stricter regulatory requirements for cryptocurrency exchanges and projects, as well as increased regulatory scrutiny and enforcement actions. The Biden administration may emphasize compliance and transparency in the cryptocurrency market to reduce market manipulation and investor risks. This is also a point emphasized by the current SEC chairman at the beginning of this article.

Therefore, the differing political positions and attitudes represented by Trump and Biden as candidates will directly influence regulatory agencies' attitudes and policies towards the cryptocurrency market.

Currently, the SEC does not seem willing to easily expand the influence of cryptocurrencies, especially concerning traditional financial instruments. The SEC is concerned about the instability and risks of the cryptocurrency market and its impact on the traditional financial system, leading to a relatively conservative regulatory policy. Against this backdrop, the approval of the Ethereum spot ETF will face stricter regulatory scrutiny and requirements, undoubtedly increasing the difficulty and uncertainty of approval for this asset.

In summary, the approval of the Ethereum spot ETF faces multiple challenges and obstacles. From the practical application of the PoS consensus mechanism, the influence of the Ethereum Foundation and its founder, to the attitudes and policies of regulatory agencies, these factors will collectively determine the prospects and possibilities for the approval of the Ethereum spot ETF.