(Bloomberg) -- Crypto exuberance is hitting overdrive thanks to the game-changing launch of Bitcoin ETFs — with seven issuers now pushing US regulators to greenlight funds tracking Ether, the world’s second-largest cryptocurrency.

Yet the exchange-traded fund crowd — including those who battled to secure US Securities and Exchange Commission Chair Gary Gensler’s approval last time around — have a sobering message for digital-currency proponents: Not so fast.

Those issuers who are, for now, staying out of the Ether-filing race cite the token’s ambiguous legal status. Others caution that the SEC is unlikely to capitulate just because it approved 10 Bitcoin spot funds in January, given the big differences in the underlying market infrastructure.

The SEC has to respond to one of the filings by May 23, where the regulator will either approve or deny an application from VanEck. If they deny the request, issuers who are still looking to win approval will need to re-file applications, or they could challenge the regulator’s decision through litigation. 

Ether has rallied amid expectations of a swift approval, with its roughly 50% rise so far this year mirroring Bitcoin’s attention-grabbing gains. Ether is the native token of Ethereum, the most commercially-used blockchain, which allows users to run applications on top of the protocol.    

Crypto asset manager Bitwise, for one, is taking a cautious approach. While the San Fransisco-based firm’s Bitcoin ETF has garnered more than $1 billion in assets since trading began, Bitwise hasn’t filed for an application for a spot-Ether ETF. 

“We want to file for a product that’s going to ultimately be accepted and not just throw pasta up at the wall,” said Katherine Dowling, Bitwise’s general counsel. “We’d like to have that open dialogue so that we’re taking into account concerns that they might have.”

Valkyrie Chief Investment Officer Steven McClurg also doesn’t expect a spot Ether ETF to arrive anytime soon, looking instead at next year or two, he told The Block. McClurg didn’t respond to a request for comment. 

Ether’s Status 

One potential obstacle is the SEC’s stance on the legal classification of Ether - specifically, whether it should be considered a commodity or a security. For an Ether ETF to be approved, the SEC “has to effectively come to a conclusion that ETH is not a security,” said Matthew Frankle, a partner at law firm Haynes Boone. 

The current applications are filed assuming Ether is a commodity, similar to Bitcoin. But if the regulator were to determine between now and May 23 that Ether was a security instead, that would introduce a whole ecosystem of regulated entities surrounding the ETF that the current filings have not set up. 

“If it’s a security, it needs to be traded on a registered exchange, which Coinbase is not. If you are buying and selling securities, that needs to be done by a broker-dealer,” another aspect that’s difficult, Frankle said. Coinbase Global Inc. is the largest US crypto trading platform.  

These barriers could be “fatal” to an Ether ETF, said Richard Kerr, a partner at K&L Gates. “There’s just a lot of bells and whistles that go along with holding a pool of securities.” 

Correlation Study 

Another condition likely needed for approval is for issuers to successfully prove the correlation between the pricing of Ether in the spot and futures markets, and establish that the Ether can’t be manipulated without perpetrators getting caught. It’s unclear whether the SEC will be satisfied by the correlation analysis related to Ether. Dowling says the data history for Ether is shorter than for Bitcoin, so this might be an issue.

“Clearly the Ether futures market is not as robust and mature as the Bitcoin futures market was. It’s a few years behind,” Kerr added. “ So the SEC, if unable to get comfortable on the correlation analysis, could chose to deny the application.”

Establishing correlation would show that Ether spot and futures are similar products, and that surveillance sharing agreements by exchanges should be effective in detecting fraud.

Coinbase submitted a public comment to the SEC, arguing that Ether’s market depth and price correlation across spot markets are “highly indicative” of a market resilient to fraud and manipulation. Coinbase serves as custodian on most of the Bitcoin ETFs.


Lastly, the staking mechanism of Ether might complicate the process. Some of the applications — namely ones from Ark Investment Management and Franklin Templeton — are proposing to allow staking, that is when Ether holders lock their tokens to the Ethereum network to help validate transactions and to earn additional yield. 

The SEC has said it considers staking services as offering securities in its lawsuits against Coinbase and Kraken. 

The staking services that ETF issuers will provide is different from those by Coinbase and Kraken, according to Greg Xethalis, the general counsel of Multicoin Capital who had represented clients pursuing crypto ETF registrations with the SEC. That’s because the ETF trust itself is the owner of its assets, rather than providing staking as a service, he said. 

However, staking also introduces another layer of complexity with potential tax and operational issues, and staking would have to be “carefully designed” to fit in that framework, said Xethalis. 

In the end, it could come down to the courts. A legal victory by Grayscale in August against the SEC paved the way for the approval of spot Bitcoin funds.  

Approval is “a matter of when not if,” according to Dave Lavelle, global head of ETFs at Grayscale, which hasn’t ruled out taking further legal action if needed to gain approval for an Ether ETF. 

“If we don’t see an approval, we will likely see a court challenge by someone,” Multicoin’s Xethalis said.   

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