After approving ETFs based on Bitcoin, the US Securities and Exchange Commission has now given the green light to ETFs based on Ethereum. In principle, the decision is a welcome one, as it allows investors to access Ethereum through a regulated and transparent ETF wrapper.
This not only clears a hurdle for ETF but signifies another positive step towards mainstream acceptance.
Just like Bitcoin ETFs, the Ethereum ETFs would increase exposure to the world’s second-largest cryptocurrency – leading to potential inflows due to easier and greater access. This development could lead to increased market confidence towards cryptocurrencies as a result.
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While the SEC’s decision was a welcome surprise that initially sparked positivity, the timeline for the approval of each individual Ether ETF remains unclear.
“Unlike when the Bitcoin ETFs were approved with the S1 registration statements already prepared in advance, this process could take weeks for Ether ETFs – delaying trading as a result,” said Lukman Otunuga, an analyst at forex broker FXTM. “This uncertainty over timelines and no guarantee around the S-1 forms being approved may impact upside gains in the short term.”
Still, Ethereum jumped over 20% last week with prices slowly approaching the $4000 psychological level.
Any positive news regarding the S-1 forms could fuel upside gains, possibly taking the cryptocurrency toward the 2024 high at $4092.3. There was some selling of ETH early this week as traders who had been buying the rumour of approval sold out, but ETH is rallying again at time of writing.
Ethereum ETFs still represent risks for retail
While this will be well received by the crypto community, it is not all cause for celebration, according to Dr Alpay Soytürk, Chief Regulatory Officer at Spectrum Markets.
“It should be noted that this form of investment is and will remain largely reserved for US investors,” Soytürk said. “Although spot crypto ETFs are tradable on some European exchanges, they are not allowed to be issued in the European Union. Where they are available for trading, the issuer is based outside the EU and is therefore not subject to EU legislation and therefore does not benefit from the associated investor protection.”
The reason for this is the directive on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, better known as the UCITS Directive.
In addition to a number of obligations relating to investment policy, risk management, transparency and custody, there are clear requirements relating to diversification.
This directive includes diversification rules for the inclusion of indices in which funds such as ETFs invest. However, while member states have numerous options to grant certain exemptions, these are all conditional and virtually none of them allow for disproportionate concentration risk on an unsecured basis.
In this respect, the question also arises as to how the protection associated with authorisation by a securities regulator should be assessed. “This is not a criticism of the Ethereum project, but rather the question of whether the authorisation of investment funds in individual securities is a sensible measure,” Soytürk commented.
Of course, the newly approved ETFs offer a way to gain exposure to Bitcoin or Ethereum without having to hold the crypto assets directly.
There have been other alternatives previously available, such as securitised derivatives on BTC or ETH. But the ETF approval does pave the way for large institutional institutions to get heavily involved in distribution, as the fierce fee competition among large US asset managers has shown in the recent past.
“If this leads to a situation where retail investors with a more conservative risk profile and investment objectives not suited to this type of security become more involved and are unable to adequately compensate for sharp downturns, the securities regulator will be caught in the crossfire,” Spectrum’s Soytürk warned.
