The Securities and Exchange Commission approved spot ethereum exchange-traded funds just one day after the U.S. House of Representatives passed a bill to provide a regulatory framework for the US digital asset ecosystem. 

The SEC approved spot bitcoin ETFs in January this year and issuers applied to launch spot ethereum ETFs, for which there are deadlines this week.

Data Provider CCData said in a report that the SEC had requested that stakeholders update their 19b-4 filings for their spot ethereum ETFs which suggested that the regulator was gearing up to approve these ETF applications ahead of a crucial deadline on 23 May.

Brian Amstrong, chief executive of listed crypto exchange Coinbase, said:

Well said

What a week! https://t.co/UsxH9Mxqo7

— Brian Armstrong (@brian_armstrong) May 23, 2024

Daniel Seifert, UK country director of Coinbase, said in an email: “This move solidifies the fact that cryptocurrency is not merely a trend, representing a global transition towards digital assets in order to reshape the existing financial system. The expansion of crypto’s utility will have significant effects on innovation, and we expect to see an escalation of activity in the market.”

Sergey Nazarov, co-founder of Web3 services platform Chainlink, said in an email that capital markets will be the next large source of adoption for the cryptocurrency industry. 

“One of the most important aspects of this ETF approval is the spotlight it places on the potential of smart contracts and decentralized applications (dApps), which are critical use cases for Ethereum. In our daily work with global banks, asset managers, and financial market infrastructures,” Nazarov added. “We continue to observe increasing interest in smart contracts, the adoption of blockchain technology, and a growing interest in cryptocurrencies as a legitimate asset class.”

Potential flows

ETC Group, the European crypto ETP issuer predicted in a report there could potentially be 1.65bn of net inflows into US ethereum ETFs. This is 12.5% of cumulative net fund inflows of $13.2bn into US spot bitcoin ETFs since trading launched on 11 January 2024. 

However, ETC Group argued that US investors are receiving a suboptimal investment vehicle for ether. 

“The creation-redemption mechanism is still not done in kind and staking has not been allowed within the filings,” added ETC Group. “Thus, US investors won’t be able to fully capture Ethereum’s total return profile via staking returns that currently amount to around 3.2% p.a.”

There are nine firms in the race for a spot at Ethereum ETF according to CCData – VanEck, ARK/21Shares and Hashdex have applications with their final decision deadlines approaching later this month. Grayscale aims to convert its existing Grayscale Ethereum Trust into a spot ETF and BlackRock has a third deadline for its iShares Ethereum Trust on 8 June.

“Given that the SEC is unlikely to give any single applicant or subset of applicants an early approval advantage, it is probable that the regulatory body will issue approvals for all applicants simultaneously,” said CCData.

The report continued that the ETF approval would lead to short term outflows from Grayscale Ethereum Trust but the positive inflows from the ETFs will likely be the catalyst for Ethereum to reach new all-time highs.

“Assuming Ethereum will be able to attract 50% of Bitcoin funds ETF flows, which recorded a total inflows of approximately $13bn on May 21st since their inception in January, this would equate to $3.9bn,” added CCData.

Source: CCData

Traders are focusing on Ether as momentum continues to build around the pending spot Ether ETF approval decision. On May 22, Ether futures hit a record trading day at $2.85B in notional volume. https://t.co/ojCvcj4yQM pic.twitter.com/KEarIUtwLY

— CME Group (@CMEGroup) May 23, 2024

Matthew Sigel, head of digital assets research at VanEck, said: “TLDR: We expect the improved political backdrop will lead to further victories for digital asset investors & developers, via new laws & in the courts, that draw investment to Bitcoin, Ethereum and other open-source blockchain software.”.

We are so thrilled to confirm that the SEC has approved, pursuant to Section 19(b) of the Securities Exchange Act of 1934, our exchange partner CBOE’s proposed rule change to list and trade a @vaneck_us spot #Ethereum ETF on the CBOE! 🥳🚀

TLDR: We expect the improved political… pic.twitter.com/o6ZbFWKExi

— matthew sigel, recovering CFA (@matthew_sigel) May 23, 2024

“Many traditional finance market participants may not fully understand that ETH is not just a speculative asset but has extensive real-world utility underpinning a vibrant decentralized application ecosystem,” added Sigel. 

He said ethereum supports over 270 million unique user addresses, processes an average of 1.2 million transactions daily, on-chain value settlements exceeded $2.8 trillion over the last year, compared to PayPal volumes of $1.5 trillion and Visa network volume of $15 trillion.

“That’s why today feels particularly sweet to VanEck, the first traditional ETF issuer to file for both Bitcoin & Ethereum ETFs,” said Sigel. “We expect this improved political backdrop will lead to further victories via new laws and in the courts that draw investment to Bitcoin, Ethereum and other open-source blockchain software. Stay tuned for further updates. PS – we expect to go FIRST.”

James Seyffart, research analyst at Bloomberg Intelligence, highlighted ether ETFs will not begin trading immediately:

Going to add here. Typically this process takes months. Like up to 5 months in some examples but @EricBalchunas and I think this will be at least somewhat accelerated. #Bitcoin ETFs were at least 90 days. Will know more soon.

— James Seyffart (@JSeyff) May 23, 2024

Here's the link for everyone asking https://t.co/mzOPL1EZqC pic.twitter.com/4ZRQY0Y6vk

— James Seyffart (@JSeyff) May 23, 2024

Regulatory framework

On 22 May the U.S. House of Representatives passed H.R. 4763, the “Financial Innovation and Technology for the 21st Century Act,” to provide a regulatory framework for the US digital asset ecosystem. 

The legislation provides the Commodity Futures Trading Commission (CFTC) with new jurisdiction over digital commodities and clarifies the Securities and Exchange Commission’s (SEC) jurisdiction over digital assets offered as part of an investment contract. Additionally, the bill establishes a process to permit the secondary market trading of digital commodities if they were initially offered as part of an investment contract. In addition, the bill imposes comprehensive customer disclosure, asset safeguarding, and operational requirements on all entities required to be registered with the CFTC and/or the SEC.

Patrick McHenry, chairman of the House Financial Services Committee, said in a statement that  the House took a historic step by passing FIT21 with broad, bipartisan support.

“FIT21 provides the regulatory clarity and robust consumer protections necessary for the digital asset ecosystem to thrive in the United States,” he added. The bill also ensures America leads the financial system of the future and remains a hub for technological innovation.”

#WATCH: Chairman @PatrickMcHenry joins @SquawkCNBC to discuss yesterday's historic, bipartisan vote on the landmark #FIT21. He covers:

‼️ Major provisions
🔎 Clarifying @CFTC vs @SECGov jurisdiction
🚂 Next steps on the road to enactment

📺 Don't miss this conversation 👇 pic.twitter.com/F49JjPf5tH

— Financial Services GOP (@FinancialCmte) May 23, 2024

Who benefits from the passage of the #NotFIT4PurposeAct:
✅Wealthy #crypto firms that have chosen not to register w/the @SECGov or otherwise comply w/the securities laws

Who stands to lose:
❌Ordinary investors trying to build wealth

— U.S. House Committee on Financial Services (@FSCDems) May 22, 2024

Chris Dixon, general partner at venture capital firm Andreessen Horowitz and founder of a16zcrypto, which invests in web3 technologies, said: “It’s an important step in providing long-awaited regulatory clarity for crypto, protecting U.S. consumers, and promoting American innovation. It’s also a big step for holding bad actors accountable, which is good for everyone.

The House of Representatives made history today by passing the Financial Innovation and Technology for the 21st Century Act (FIT21). FIT21’s success is proof that protecting blockchain technology in the U.S. has strong, bipartisan support.

It’s an important step in providing…

— cdixon.eth (@cdixon) May 22, 2024

Brian Quintenz, global head of policy at a16zcrypto and ex-CFTC Commissioner, said: 

A landmark piece of legislation that embraces concepts of decentralization for regulation just had a very good day. #FIT21 https://t.co/49yIMXdxKE

— Brian Quintenz (@BrianQuintenz) May 22, 2024

Kristin Smith, chief executive of Blockchain Association, the trade organisation, said:

1/ #FIT21 passed the House today with 279 votes.

Today’s bipartisan support signals that both parties see the value in working towards establishing clear guidelines to enable innovation while prioritizing consumer safeguards.

Sounds simple, but the journey here hasn’t been.

— Kristin Smith (@KMSmithDC) May 22, 2024

3/ The SEC has taken an increasingly aggressive enforcement-first approach, stifling innovation and threatening to drive crypto out of the U.S.#FIT21 is Congress reasserting its authority.

— Kristin Smith (@KMSmithDC) May 22, 2024

5/ While improvements can still be made as it moves to the Senate, this vote represents clear interest in a national regulatory framework tailored for digital assets. It builds on crypto's growing political clout after 2022's turmoil.

— Kristin Smith (@KMSmithDC) May 22, 2024

The Digital Chamber is pleased to see H.R. 4763, the Financial Innovation and Technology for the 21st Century Act #FIT21 PASSED the House with overwhelming bipartisan support in a vote of 279-136 and is NOW advancing to the Senate. https://t.co/SwkRYlE6b9

— The Digital Chamber (@DigitalChamber) May 22, 2024

James Angel, Georgetown professor specializing in financial market structure and fintech, said:

The House just passed #FIT21, the #crypto market structure bill that gives more authority to the @CFTC and strips powers away from @SECGov. The bill is a bandaid on the bullet wounds of the dysfunctional US financial regulatory quagmire. We need a real rethinking.

— James J. Angel (@GuFinProf) May 22, 2024