SEC's Inconsistent Stance Raises Doubts Over Ethereum ETF Approvals

Amid ongoing speculation about the approval of spot Ethereum (ETH) exchange-traded funds (ETFs) in the United States, Coinbase General Counsel Paul Grewal argues that the Securities and Exchange Commission (SEC) has "no good reason" to deny such applications. He cites the SEC's previous statements and legal precedents that classify ETH as a commodity, not a security. However, divergent views prevail, with some suggesting that the SEC's recent investigation into Ethereum and a shift to a proof-of-stake consensus system may influence its decision.

SEC's Inconsistent Approach Raises Concerns Over Ethereum ETF Approvals

Amidst fervent anticipation for the Securities and Exchange Commission (SEC) to approve spot Ethereum exchange-traded funds (ETFs), Coinbase General Counsel Paul Grewal has denounced the agency's apparent reluctance to grant these applications.

In a forthright statement, Grewal decried the SEC's "no good reason" for denying ETF approvals, asserting that Ethereum (ETH) has been consistently classified as a commodity, not a security. He backed this assertion with evidence from both past and current SEC officials, including former Corporate Finance Director Bill Hinman and current Chairman Gary Gensler.

Grewal further highlighted the SEC's own legal precedents, the Commodity Futures Trading Commission's (CFTC) affirmation of ETH as a commodity, and the successful trading of ETH futures contracts regulated by the CFTC. These factors, he argued, unequivocally challenge any attempt to classify ETH as a security.

Grewal countered the SEC's potential reliance on the Howey test, emphasizing that digital assets like ETH do not meet the criteria for "investment contracts" or "securities" due to their lack of ongoing contractual obligations related to a commercial enterprise.

Ethereum Foundation's "Warrant Canary" Removal Sparks Speculation

Adding to the intrigue surrounding Ethereum's regulatory status, the Ethereum Foundation recently removed a "Warrant Canary" from its website following an unspecified legal inquiry. This action has sparked speculation that state authorities may be investigating the Foundation.

Fortune reported that the SEC is pursuing an "aggressive legal campaign" to classify Ethereum as a security, citing subpoenas issued to crypto companies related to an Ethereum investigation. Notably, some of these subpoenas were issued after Ethereum's transition to a proof-of-stake (PoS) consensus system, raising questions about whether this move is part of a broader effort to clamp down on ETH.

Conflicting Views on Ethereum's Status

Despite Grewal's assertions, others contend that the transition to PoS may have altered Ethereum's regulatory landscape. Gensler himself has indicated that tokens in a PoS system could be considered securities due to investors' reliance on the efforts of others.

Crypto lawyer Preston Byrne suggested that the SEC's potential challenge to Ethereum's classification may hinge on the distribution of coins during the presale.

Diverging Opinions on Approval Prospects

Following the Bitcoin ETF spot approval, Commissioner Hester Peirce expressed concerns about the SEC's inconsistent treatment of applications in this area. She warned that the agency's failure to follow standard procedures would damage its reputation.

Former CFTC Commissioner Brian Quintenz pointed to the SEC's explicit recognition of ETH as a non-security asset when approving ETH futures ETFs. He argued that this decision, made well after Ethereum's transition to PoS, served as a clear indication of the agency's position on ETH's regulatory treatment.

Diminishing Optimism for ETF Approvals

Bloomberg ETF analysts Eric Balchunas and James Seffart have lowered their expectations for ETH ETF spot approvals to 25% by May 23, the deadline for the SEC to rule on applications from Ark and 21Shares. They cited the SEC's lack of timely comments compared to the Bitcoin ETF approval process.

However, others remain more optimistic, with Bernstein analysts Gautam Chhugani and Mahika Sapra predicting a 50% probability of approval within the year. They cited the industry's determination to fight for ETH ETF approval and the parallels between Ethereum and the precedent set by the SEC's handling of the Grayscale Bitcoin ETF.

SEC Postpones Decisions, Fidelity Adds Staking

The SEC has delayed decisions on several Ethereum spot ETF applications, most recently extending the deadline for VanEck's application to May 23. Fidelity and Grayscale have amended their documents to include staking, indicating their continued pursuit of ETH ETF approval.

Despite the delays, the future of Ethereum ETF approvals remains uncertain. The SEC's inconsistent approach, combined with the transition to PoS, has created a complex regulatory landscape that could prolong the approval process or even result in denials. As the May 23 deadline approaches, the industry awaits the SEC's next move with a mix of anticipation and trepidation.