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

Author: Sarah Wynn, The Block; Translator: Deng Tong, Golden Finance

Summary

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

• The issuer responsible for the S-1 contacted the SEC, but the SEC’s Division of Corporate Finance appeared to disagree with the Division of Trading and Markets, sources said.

This is a critical time for exchanges to grapple with the SEC’s seemingly sudden shift in potentially approving a spot Ethereum ETF.

On Monday, the SEC’s Division of Trading and Markets called exchanges to tell them that 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 that they were inclined to approve the plans. One person familiar with the matter noted that this was a 180-degree turn from what the SEC told issuers two weeks ago, when the agency showed no interest in the filings. "This is a completely unprecedented situation, which means it's completely political," the source said. At the time, 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, the people familiar with the matter said.

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 likely a political decision,” said one person familiar with the matter.

Some sources speculated 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 NFTs that President Joe Biden didn’t know what cryptocurrency was and said, “If you like any form of cryptocurrency, it comes in a lot of different forms, and if you support cryptocurrency, you better vote for Trump.”

Sources said they wouldn’t be surprised if this becomes 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 may win by having the U.S. Securities and Exchange Commission approve a spot Ethereum ETF.

The U.S. Securities and Exchange Commission did not immediately respond to a request for comment.  

Ji Kim, chief legal and policy officer at the Crypto Innovation Council, noted that “lawmakers are hearing from their constituents that crypto is not only important, but significant, and that they want regulation in this space.”

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

Next up is an update to the Form 19b-4 following the receipt of the SEC’s opinion. Sources said that given the tight deadline, comments on the 19b-4 will be minimal.

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

Not so sudden

Some are unsure if the SEC will suddenly change its mind on a spot Ethereum ETF.

“If the SEC wanted to draw the line at Ethereum — whether because they believed it was a security, because they were concerned about the correlation between the spot and futures markets, or some other reason — their chances of doing 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.

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

Geraci also pointed out 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 resolved at the time, including whether there would be a cash or physical redemption model.

“This 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.