Spot Ethereum ETFs Hit Roadblock Amid Intensified SEC Scrutiny

Approval for spot Ethereum exchange-traded funds (ETFs) in May appears unlikely due to recent developments. Subpoenas issued to crypto firms regarding their connection with the Ethereum Foundation and limited SEC engagement with ETF applicants cast doubt on a May approval. Speculation suggests the SEC may scrutinize the original Ethereum ICO, potentially classifying it as an unregistered securities offering rather than solely focusing on secondary ETH trading.

Uncertainty Looms Over Spot Ethereum ETFs as SEC Scrutiny Intensifies

The prospects of spot Ethereum exchange-traded funds (ETFs) gaining approval by May are now deemed "extremely unlikely," according to a recent analysis by Alex Thorn, Head of Firmwide Research at Galaxy Digital.

Thorn's assessment stems from recent reports indicating that the Securities and Exchange Commission (SEC) has issued subpoenas to crypto firms inquiring about their connections with the Ethereum Foundation. This development, coupled with the lack of substantial engagement by the SEC with ETF applicants just two months before the initial deadline, has raised significant doubts about the anticipated May approval.

Ominously, Fortune reported this week that the SEC is actively pursuing a legal strategy to classify ether (ETH) as a security, citing investigations into U.S. companies that have received subpoenas. Additionally, The Block reported that the Ethereum Foundation voluntarily received a confidential inquiry from an unnamed state authority, prompting the removal of a "warrant canary" from its website.

Thorn, a veteran of Fidelity Investments, speculates that the SEC's pursuit of information regarding crypto firms' dealings with the Ethereum Foundation may signal an exploration of whether the initial coin offering (ICO) in 2014 violated securities laws. He suggests that while the SEC may distinguish between the ICO and the current secondary trading of ETH, any enforcement action against the Ethereum Foundation over a decade later would be highly unusual.

The question of whether ETH constitutes a security remains unanswered by SEC Chairman Gary Gensler. The SEC reportedly views Ethereum's 2022 "Merge" upgrade as increasing the likelihood that ETH may be classified as a security due to the network's transition from proof-of-work to proof-of-stake. However, the SEC authorized the launch of several futures-based Ethereum ETFs in 2023, a year after Ethereum implemented proof-of-stake.

Thorn argues that any attempt by the SEC to assert securities violations against ETH or the Ethereum Foundation would be a legally precarious move, given established precedents and the industry's long-standing existence. Moreover, Thorn suggests that such enforcement actions could further strain the SEC's already challenged legal position in courts and on Capitol Hill.

Thorn's cautious outlook aligns with the skepticism expressed by other market analysts regarding the approval of a spot Ethereum ETF by May. Matt Hougan, CIO of Bitwise, recently stated that a delay in approval could be beneficial, allowing Wall Street to absorb and digest the recent spot Bitcoin ETFs before shifting focus to new products. He anticipates that a later approval could result in more significant asset inflows for spot Ethereum ETFs.

The heightened scrutiny from the SEC and the resulting uncertainties have cast a shadow over the prospects of spot Ethereum ETFs in the near future. The industry awaits further developments as the SEC continues its investigations and the May deadline rapidly approaches.