SEC Delays Decision on Ethereum ETF Proposal, Raising Questions About Approval

The U.S. Securities and Exchange Commission (SEC) has postponed its decision on the Invesco Galaxy Ethereum ETF, a fund that would track the spot price of Ether, the native cryptocurrency of the Ethereum network. The SEC has initiated proceedings to determine whether to approve or reject the listing of the fund, and has requested public comments on several issues related to the proposal.

What is the Invesco Galaxy Ethereum ETF?

The Invesco Galaxy Ethereum ETF is a joint venture between Invesco, a leading asset management firm, and Galaxy Digital, a diversified financial services and investment company focused on the digital asset sector. The fund would invest in Ether directly, and would seek to reflect the performance of the Bloomberg Galaxy Ethereum Index, which measures the price of Ether across multiple exchanges.

The fund would be the first of its kind to offer exposure to Ether spot prices in the U.S. market, as opposed to Ether futures contracts, which are already traded on the Chicago Mercantile Exchange (CME). The fund would also provide investors with the convenience and security of holding Ether in a regulated and transparent vehicle, without the need to deal with the technical challenges of buying, storing, and transferring Ether on their own.

Why did the SEC delay its decision?

The SEC published the proposal for the Invesco Galaxy Ethereum ETF in the Federal Register on November 8, 2023, and had until February 6, 2024, to make a decision. However, the SEC decided to extend the review period and institute proceedings to further evaluate the proposal, as it has done with several other spot Ethereum ETF applications in recent weeks.

The SEC has asked for public comments on various aspects of the proposal, such as:

• Whether the fund is consistent with the Exchange Act and the rules of the Cboe BZX Exchange, where the fund would be listed and traded.
• Whether the arguments that supported the approval of spot Bitcoin ETFs in January 2024 apply equally to the Invesco Galaxy Ethereum ETF, or whether there are unique features or risks associated with Ether and its ecosystem that raise concerns about its susceptibility to fraud and manipulation.
• Whether the fund would be vulnerable to market manipulation, given the nature, liquidity, and transparency of the Ether spot and derivatives markets, and the potential surveillance-sharing agreements with regulated platforms that trade Ether, such as Coinbase.
• Whether the fund would accurately track the price of Ether, and whether there is a sufficient correlation between the spot and futures prices of Ether.

The SEC has invited interested parties to submit their comments within 21 days of publication in the Federal Register, and rebuttal comments within 35 days of the same. The SEC has not specified a new deadline for its decision, but it could take up to 240 days from the initial publication date, which would be July 6, 2024.

What are the chances of approval?

The delay of the Invesco Galaxy Ethereum ETF decision does not necessarily imply a negative outcome, as the SEC may simply need more time and information to assess the proposal. However, it also does not guarantee a positive outcome, as the SEC may still have unresolved issues or objections to the fund.

The approval of the Invesco Galaxy Ethereum ETF would depend on several factors, such as:

• The level of public interest and support for the fund, as well as the quality and quantity of the comments submitted to the SEC.
• The degree of confidence and comfort that the SEC has with the Ether market, its regulation, its infrastructure, and its innovation.
• The consistency and coherence of the SEC’s approach and rationale for approving or rejecting different types of cryptocurrency ETFs, such as spot, futures, or hybrid.

The likelihood of the SEC approving a spot Ethereum ETF remains uncertain, as different analysts and experts have different opinions and predictions. For instance, Bloomberg ETF analyst James Seyffart estimates a 60% chance of approval by May 2024, while a JP Morgan member suggests a 50% chance. A Polymarket prediction market currently indicates a 43% chance of approval by May 2024.

What are the implications of the SEC’s decision?

The SEC’s decision on the Invesco Galaxy Ethereum ETF, and other similar proposals, would have significant implications for the cryptocurrency industry, the financial markets, and the general public. Some of the potential impacts are:

• The approval of a spot Ethereum ETF would boost the adoption, legitimacy, and value of Ether, as it would attract more institutional and retail investors, and increase the demand and liquidity for the cryptocurrency.
• The approval of a spot Ethereum ETF would also benefit the Ethereum network, as it would incentivize more innovation, development, and participation in the decentralized applications and services that run on the platform, such as DeFi, NFTs, and Web3.
• The rejection of a spot Ethereum ETF would disappoint and frustrate the cryptocurrency community, as it would signal a lack of recognition and support from the SEC, and create more uncertainty and barriers for the growth and development of the sector.
• The rejection of a spot Ethereum ETF would also create a competitive disadvantage for the U.S. market, as it would lag behind other jurisdictions that have already approved or are considering approving spot Ethereum ETFs, such as Canada, Brazil, and Europe.

The SEC’s decision on the Invesco Galaxy Ethereum ETF, and other spot Ethereum ETF proposals, is eagerly awaited by the cryptocurrency industry and the financial markets, as it would set a precedent and a tone for the future of the sector. The decision would also reflect the SEC’s vision and strategy for regulating and fostering innovation in the digital asset space.