Cryptocurrency exchange Coinbase has thrown its support behind Grayscale’s application to convert its Ethereum Trust into a spot Ether ETF, urging the SEC for approval.
One of Coinbase’s key arguments was that Ether is not a security.
Coinbase Bats For Spot Ether ETFs
Coinbase has thrown its hat in Grayscale’s corner, standing behind the firm in its application to convert its Ethereum Trust into a spot Ether exchange-traded product. Coinbase’s Chief Legal Officer shared the crypto trading platform’s 27-page letter outlining the legal, technical, and economic rationale for why the United States Securities and Exchange Commission should approve an Ether-based ETP.
“Today @coinbase responded to @SECGov’s request for comment on the proposed @Grayscale Ether Trust ($ETHE) ETP. 27 pages and 96 citations that provide the (1) legal, (2) technical, and (3) economic rationale for approval.”
Many analysts have predicted that the SEC will approve a spot Eher ETF by May of this year. In October 2023, Grayscale and NYSE Arca filed an application to convert the Grayscale Ethereum Trust to a spot Ether ETF. Several others, including BlackRock and Fidelity, have also filed for spot Ether ETFs. Some applicants are also aiming to generate additional yield by staking the underlying ETH.
Major Arguments
Coinbase made several arguments to present its case, including stating that Ether has been classified as a commodity, not a security. This was reflected in the Commodity Futures Trading Commission’s approval of ETH futures, statements from SEC officials, and multiple court rulings. Furthermore, Coinbase argued that the Securities and Exchange Commission had not objected to the CFTC’s treatment of ETH as a commodity.
“Our letter lays out what anyone knows who’s paid even the slightest bit of attention to the subject: ETH is not a security. In fact, before and after the Merge, the SEC, the CFTC, and the market have treated ETH not as a security but a commodity.”
He further added that Ethereum’s Proof-of-Stake consensus mechanism has demonstrated strong governance characteristics.
“Ethereum’s proof-of-stake consensus has “demonstrably strong governance that exhibits robust characteristics across ownership concentration, consensus, liquidity, and governance, mitigating risks of fraud and manipulation.”
Spot ETH ETFs Must Be Approved
Coinbase also argued that the SEC’s approval of spot Bitcoin ETFs applies equally and, in some ways, is a greater force for the listing of Grayscale’s spot Ether ETFs.
“ETH’s market depth, tightness of spreads, and price correlation across spot markets are highly indicative of a market resilient to fraud and manipulation. ETH’s notional dollar trading volume is significantly greater than the vast majority of the stocks that comprise the S&P 500, including when adjusted for aggregate market value.”
According to market data, ETH ownership and trading activity are highly dispersed, with high liquidity and tight spreads indicating an efficient and mature market. Coinbase also argued that ETH futures ETFs are similar to spot Ether-based funds, and it would be arbitrary for the SEC to approve one but not the other.
It also argued that the technological and operational security mechanisms in the Ethereum blockchain limit ETH’s susceptibility to fraud or market manipulation. Finally, Coinbase argued that it had sophisticated market surveillance to monitor trading on its platform, along with an agreement with the Chicago Mercantile Exchange. It must be noted that the approval of spot Ether ETFs could significantly benefit Coinbase’s custodial business.
Concentration Risk
Meanwhile, analysts from the rating agency S&P have highlighted their concerns that spot Ethereum ETFs that include staking could introduce a new concentration risk. Some applicants, such as ARK Invest and Franklin Templeton, have proposed allowing staking in the fund. S&P managing director Andrew O’Neill argued,
“An increase in Ether staking ETFs could affect the mix of validators participating in the Ethereum network’s consensus mechanism. The participation of institutional custodians could reduce the current concentration on the Lido decentralized staking protocol. However, it may also introduce new concentration risk, particularly if a single entity is chosen to stake the bulk of Ether included in these ETFs.”
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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