Key Takeaways From SEC’s Surprising Ethereum ETF Approval

YEREVAN (CoinChapter.com) — The U.S. Securities and Exchange Commission (SEC) has approved the sale of spot Ether Exchange-Traded Funds (ETFs) in the United States, merging proposals from Nasdaq, NYSE, and CBOE exchanges, which sought rule changes to allow trading of Ethereum investment products.

This marks the SEC’s second major decision on crypto Exchange-Traded Products. In January 2024, the SEC approved Spot Bitcoin ETFs after a long battle. This is a significant approval, but trading will not start immediately. That said, issuers need the SEC to approve individual ETF registration statements detailing investor disclosures.

SEC Stil Concerned About Ether ETF Price Manipulation

The SEC emphasized the need for comprehensive surveillance-sharing agreements with the Chicago Mercantile Exchange (CME) to detect and deter fraud and manipulation.

Each exchange has a surveillance-sharing agreement with the CME through their common membership in the Intermarket Surveillance Group. Although the CME does not currently surveil spot ether markets, its futures contracts are highly correlated with the spot market. This means that price manipulations in the spot market will likely affect the futures market.

The exchanges provided correlation analyses to demonstrate whether price movements in the CME ether futures market align with those in the spot ether markets. This data is crucial for evaluating if the CME’s surveillance over the futures market can effectively detect and deter fraud in the spot markets.

Protecting Investors and Ensuring Market Integrity in Ethereum ETFs

The SEC analyzed Section 11A(a)(1)(C)(iii) of the Exchange Act to ensure ether-based ETP proposals protect investors and maintain market integrity. Several key requirements were set for this approval:

• Pricing Information: Pricing and last-sale information for each ETP must be available via the securities information processor. Intra-day indicative values (IIV) and net asset values should be available on each ETP’s website and major market data vendors, updated every 15 seconds during trading hours.
• Transparency of Portfolio Holdings: ETPs must regularly disclose their portfolio holdings, including the amount of ether and any cash or cash equivalents held. This information is typically updated daily and made available on the ETP’s website and major financial information platforms.
• Surveillance Procedures: Exchanges must have data exchange agreements to share information with other regulated markets, enhancing the ability to detect and deter fraudulent practices. They also need to specify conditions under which they would implement trading halts and suspensions.

Addressing Volatility and Risk Concerns in Ethereum ETFs

The SEC also addressed volatility and risk concerns raised by commenters. For instance, one commenter highlighted Ether’s price volatility, arguing that spot ether ETPs could threaten retail investors and the broader financial system by entangling the crypto industry with traditional finance.

The SEC considered these concerns within the broader context and concluded that the proposals meet the Exchange Act requirements, including preventing fraud and manipulative acts.

While the SEC acknowledged the inherent market volatility, they noted it might attract many investors. The major concern for the SEC and other authorities is the impact of merging crypto with traditional finance on the broader financial system.

The gradual introduction of multiple derivative assets could have significant effects on the financial system—effects that remain largely unexamined and unaddressed. Ignoring these potential consequences could lead to financial instability on a much larger scale.