Coinbase legal chief says SEC has 'no good reason' to deny Ethereum spot ETFs

Amid ongoing speculation around the prospect of a spot Ethereum ETH

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exchange-traded fund approvals in the United States, Coinbase General Counsel Paul Grewal said the Securities and Exchange Commission had “no good reason” to deny ETF applications.

“Sigh…again with the ETH misinformation as we wait for a decision on ETH ETPs,” Grewal wrote on X. “Millions of Americans hold ETH; it has been vital to crypto since its launch in 2015; and ETH is a commodity, not a security.

Grewal went on to say that the SEC has been taking this position on its status for years, with senior SEC officials, such as former Corporate Finance Director Bill Hinman’s speech in 2018, suggesting that ether n It wasn’t a security. The same year, before becoming SEC chairman, Gary Gensler also testified to Congress that ether is not a security, Grewal added.

Recent comparisons between ether and bitcoin by the SEC’s own lawyers in the case against Ripple Labs, the Commodity Futures Trading Commission and the federal courts’ confirmation of ether as a commodity and futures contracts on ether which began trading on futures contracts regulated by the CFTC. trading in 2021, were additional arguments against classifying ether as a security, Grewal said.

“The SEC has no good reason to deny applications for ETH ETPs. And we hope they don’t try to invent one by questioning ETH’s long-established regulatory status, which the SEC has repeatedly approved. That’s not how the law works. And Americans deserve better,” Grewal said.

Additionally, the Coinbase CLO added that the SEC’s Howey test also does not determine the status of ether. “Digital assets like ether that do not involve an ongoing contractual obligation related to a commercial enterprise are not “investment contracts” or “securities.” Even if the test were applied, ether fails .in any case, he argued.

The Ethereum Foundation in the spotlight

Yesterday, The Block reported that the Ethereum Foundation – a Switzerland-based non-profit organization that helps support the Ethereum ecosystem – had removed a “Warrant Canary” from its website following a voluntary and confidential investigation of an unspecified state authority. according to the Foundation GitHub deposit.

“This pledge removes a section of the footer because we received a voluntary survey from a state authority that included a privacy requirement,” Pablo Pettinari, front-end developer at the Ethereum Foundation, said in a pledge. from February 26.

The removed “Warrant Canary” image represented that the Ethereum Foundation had not been contacted by an agency in a manner that required the contact not be disclosed. He also removed text that said: “The Ethereum Foundation (Stiftung Ethereum) has never been contacted by any agency, anywhere in the world, in a manner that requires that such contact not be disclosed.”

Historical records from the Wayback Machine indicate that the canary and its message were still visible on the Foundation’s website as recently as January.

Meanwhile, Fortune reported that the SEC appears to be “waging an aggressive legal campaign to classify Ethereum as a security” – citing crypto companies that have received subpoenas related to an Ethereum-related investigation.

People at companies that received subpoenas said the demands were very specific to the Ethereum Foundation. Additionally, some companies recently received subpoenas, while others got theirs after Ethereum moved to a proof-of-stake (PoS) consensus system in September 2022 as part of a transition called “The Merge”.

Contrary to Grewal’s view of the SEC’s position throughout Ethereum’s history, others see the move to PoS as a key differentiator, with the investigation raising questions over whether it is part of a broader campaign to classify ether as a security – which could dash hopes of the regulator approving Ethereum spot ETFs In the coming months.

“To me, this situation is a case of ‘where there’s smoke, there may actually be fire,'” said James Seyffart, an analyst at Bloomberg ETF. said yesterday, in response to the news.

Diverging Views on Ether Status and Chances of One-Time ETF Approvals

Shortly after The Merge, Gensler said that tokens in a PoS consensus system could be considered securities since investors rely on the efforts of others to make profits.

However, crypto lawyer Preston Byrne said Wednesday, “If the SEC wants to try to undermine Ethereum’s claim that it’s like Bitcoin, it will do so by referencing the distribution of coins during the presale.”

Nate Geraci, ETF Store President said that when considering the SEC’s potential disapproval of Ethereum spot ETFs, it is worth revisiting Commissioner Hester Peirce’s comments following the Bitcoin ETF spot approval.

Peirce said at the time that the agency’s “arbitrary and capricious treatment of applications in this area will continue to damage our reputation well beyond crypto,” adding: “By failing to follow our normal standards and processes To examine spot Bitcoin ETFs, we created an artificial frenzy around them.

“I remind you that investors can currently purchase Ethereum ETFs based on futures contracts,” Geraci added.

Former CFTC Commissioner and global head of policy at a16z crypto, Brian Quintenz, appears to agree. “When the SEC authorized ETH futures ETFs to trade on its regulated securities exchanges, it explicitly recognized the status of the underlying asset, ETH, as not being a security and outside its jurisdiction,” a he declared. job on X yesterday.

Quintenz pointed out that the decision to approve the Ethereum futures ETF was made in October 2023 – well after Ethereum moved to PoS in September 2022. “If the SEC had any doubt about the regulatory treatment of the ‘ETH in October 2023, she would. I did not endorse the ETF. Additionally, if ETH were a security, then the ETH Futures ETF would be an illegal instrument. The SEC cannot approve an illegal instrument to trade on a national securities exchange,” he said.

“It will be interesting to see what excuse, if any, the SEC uses if it delays or denies an ETH ETF given that it has already informed the market that ETH is not under its jurisdiction,” Quintenz added. “The SEC’s conduct in refusing to acknowledge these facts is sowing confusion and actively harming the public.”

Spotting speculation on the Ethereum ETF

Initially optimistic, Bloomberg ETF analysts Eric Balchunas and James Seffart recently lowered their expectations for ETF spot approvals to 25% by May 23 – deadline for the SEC to rule on a one-time Ethereum ETF application from Ark and 21Shares, the first filed.

Analysts have cited differences in the SEC’s comment process leading to spot Bitcoin ETF approvals compared to the spot Ethereum ETF application timeline.

“The SEC’s timely comments on Bitcoin came 91 days before the final deadline. We are currently 65 days away from the Ethereum ETF deadline. Tick toc…”, Balchunas said Wednesday. “Until issuers contact the SEC, approval will remain in serious doubt,” he added. However, if the SEC were to comment, its chances would at least double, if not triple, Balchunas noted.

Timeline of Bitcoin and Ethereum ETFs. Picture: Bloomberg.

“Okay, if the SEC isn’t engaging with issuers on the Ethereum spot ETF, that’s clearly not a good sign…I will say that the SEC is not completely audited. They recently met with lawyers from Coinbase and Grayscale on this topic,” Geraci responded.

Others remain a little more optimistic about approvals, at least for a while this year. “We believe that approval of the ETH ETF this year is still a 50% probability – we prefer not to be delayed on the May 23 approval date, as participants could go to court if the SEC refuses, given the perfectly similar regulatory setup like the Grayscale Bitcoin ETF decision (ETH futures on CME, approved ETH futures ETFs, and similar tight correlations between the spot and futures market for ETH),” wrote Bernstein analysts Gautam Chhugani and Mahika Sapra in a note to clients on Wednesday. “Moreover, we don’t think the industry will give up the ETH ETF battle without a fight, pushing the SEC to come up with a truly solid and creative reason “to deny.”

The SEC recently delayed a decision on the approval of several Ethereum spot ETFs, informing VanEck on Wednesday that it was the latest contender whose verdict was delayed until May 23.

Fidelity and Grayscale also amended their documents this week to include staking. “Fidelity is not abandoning Ethereum ETFs and abandoning the SEC allowing them to participate within the ETF,” Seyffart said. “Our base case scenario is still that these projects will not be approved.”

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