Why the US SEC’s Change of Attitude on Ethereum ETF is Purely Political

summary

• On Monday, the SEC’s Division of Trading and Markets notified exchanges that they would approve 19b-4 this week, a change from their position two weeks ago, according to sources.

• Sources said the issuer responsible for the S-1 contacted the SEC, but the SEC's corporate finance department seemed to be at odds with the trading and markets department.

This comes at a critical time as exchanges grapple with the U.S. SEC’s seemingly sudden about-face on potentially approving a spot ether ETF.

On Monday, the SEC's Division of Trading and Markets called exchanges and told them it would approve 19b-4 this week, according to a person familiar with the matter. Meanwhile, Barron's reported, citing people familiar with the matter, that SEC staff told exchanges on Monday they were inclined to approve the plans.

That ’s a 180-degree turn from what the SEC told issuers two weeks ago, when it showed no interest in the documents, one person familiar with the matter noted.

"This is a completely unprecedented situation, which means this is entirely political," the source said.

Issuers responsible for the S-1s began calling the SEC. However, examiners in the SEC’s Division of Corporate Finance appeared to be at odds with the agency’s Division of Trading and Markets, according to people familiar with the matter.

Notably, the SEC’s Division of Trading and Markets approves 19b-4s, while the agency’s Division of Corporation Finance is responsible for S-1s.

“They haven’t even coordinated internally yet, which is why this is most likely a political decision,” said one person familiar with the matter.

Some sources speculate that the SEC’s change of mind could be politically motivated as the election approaches. Former President Trump has appeared to support cryptocurrency over the past month. The former president told a group of people who bought his NFT that President Joe Biden didn’t know what cryptocurrency was and said: “If you like any form of cryptocurrency, there are many different forms, and if you support cryptocurrency, you better vote for Trump.”

Sources said they would not be surprised if this became a campaign issue.

“The problem is that the Democratic Party desperately needs young people to vote. And if you look at what Biden is doing from a campaign perspective, the main positioning is to position himself as a visionary octogenarian,” the source said. The source added that President Joe Biden could win by getting the U.S. SEC to approve a spot Ethereum ETF.

The SEC did not immediately respond to a request for comment.

“Lawmakers have heard from their constituents that cryptocurrency is not only important, but significant, and they want regulation in this space,” said Ji Kim, chief legal and policy officer at the Crypto Innovation Council.

Kim added that a national poll conducted by the commission “showed an unusual split between the presidential and congressional votes, meaning that cryptocurrency voters could be a key swing voting bloc.”

Next up is an update to Form 19b-4 after receiving comments from the U.S. SEC. Comments on 19b-4 will be minimal given the tight deadline, sources said.

“They [the SEC] were doing the equivalent of writing a term paper the night before,” the source said of the agency’s work to retract its 19b-4s comments.

Not so sudden

Some are unsure whether the SEC will suddenly change its mind about a spot Ethereum ETF.

“If the SEC wanted to draw the line on ethereum — whether because they believed it was a security, because they were concerned about the correlation between spot and futures markets, or some other reason — the chances they would have done so would have been to approve an ethereum futures ETF by October of last year,” Nathan Geraci, president of The ETF Store, said in an email. “But they didn’t do that.”

The SEC previously approved a batch of Ethereum futures ETFs in October 2023, including ProShares, VanEck and Bitwise.

“Once the SEC approves an Ethereum futures ETF, that may determine the outcome of the approval of an Ethereum spot ETF,” Geraci said. “I strongly suspect the SEC learned important lessons from the spot Bitcoin ETF approval process and decided to handle the spot Ethereum ETF more quietly.”

Geraci also noted that the SEC did most of the “heavy lifting” on the language in the 19b-4 and S-1 for the spot Ethereum ETF when it approved the spot Bitcoin ETF earlier this year. Some thorny issues had to be worked out at the time, including whether there would be a cash or physical redemption model.

“It makes it easier for the SEC to wait until the last minute to engage with exchanges and issuers ,” Geraci said of the spot Ethereum ETF.