Ether ETF approvals show staking may still be a security in SEC’s eyes


The Securities and Exchange Commission’s (SEC) process for approving spot Ethereum (ETH) exchange-traded funds (ETF)s) is full of controversies and questions. To begin with, the crypto industry can’t even agree on whether the news constitutes an approval per se — the SEC is yet to clear the products for trading, after all. 

But what we should be paying the most attention to, perhaps, is the compromise on the inclusion of staking in the filings. At best, this is a sign that the product providers have come to a truce with the securities watchdog. More likely, though, it indicates the regulator’s wish to keep a back door open for further scrutiny.

Staking has been a particularly contentious issue for the spot ETH ETFs, with the two camps squabbling over the interpretation of the infamous Howey Test in relation to staking. From the SEC’s point of view, staking meets all four prerequisites to be considered an investment contract. According to the watchdog, staking involves the investment of money into a common enterprise (that is, the blockchain ecosystem) in expectation of profits by relying on the efforts of others — i.e. the blockchain’s validators and developers. So, they argue, staking should be regulated as a security under their jurisdiction.

Related: Bitcoin could grow by strides by being more like Ethereum

But the opposing argument goes that staking is nothing like traditional investment contracts, because it’s actually more like a technical service — it involves locking up crypto tokens to secure the network and ensure its smooth operation. Plus, the rewards don’t actually come from the work of validators or developers — rather, they are coded into the smart contract itself.

This debate has been raging for a long while now, so the capitulation we saw from the SEC is certainly suspicious. It feels like the agency begrudgingly conceded defeat on the ETFs knowing that it still has another tool left in its arsenal. As such, it is certainly too early for Ethereum proponents to proclaim a full victory.

Daily active Ethereum users between January 2022 and May 2024. Source: Grayscale

At the very least, we would need to see the approval of the S-1 filings, which would allow the ETFs to actually trade. And while BlackRock has allegedly updated its S-1 filing, which could be a good sign, there is no guarantee of a swift decision. It could be approved as early as next month, but equally it could still take months. There are simply no hard and fast guarantees because of the political limbo the U.S. finds itself in this year.

In fact, there is no doubt that last week’s hasty 19b-4 approval was a politically driven move. The passing of the new crypto-focused FIT21 bill through the House — with strong support from the Democrats — indicates the shifting views on digital assets from some members of the U.S. government. But, given that we have no idea what this government will even look like after this year’s presidential election, there can be very little certainty around the future regulatory attitude towards crypto.

Related: Crypto is fueling turmoil among Democrats ahead of the 2024 election

Regardless of regulation, though, once the ETFs begin trading — which is the base case scenario — we will likely see more upside in the price of ETH. To some extent, this will also likely kick off the “altseason” that everyone has been waiting for. But the expectation that this rising tide will lift all boats is perhaps misguided. It is clear to me that the focus will now remain firmly on the Ethereum ecosystem, rather than other chains. All those proclaiming an imminent approval for spot ETFs tracking the prices of Solana (SOL), Ripple (XRP) and so forth should temper their expectations. It will likely be a while until the SEC feels quite as magnanimous about the rest of the crypto ecosystem.

Spot ETH ETF or not, most altcoins will remain highly speculative investments driven by sentiment and retail interest. In fact, even for Ethereum itself, institutional interest is not guaranteed like it was for Bitcoin. The same level of demand is simply not there for spot ETH ETFs as we’re seeing with Bitcoin ETFs. And, given the ongoing uncertainty around staking, institutional investors are likely to take an even more cautious approach.

So, amid all this regulatory and political uncertainty, investors would do well to remain level-headed. We may be in for a lengthy period of regulatory scrutiny, political posturing, and a frustrating lack of clarity. As we know, markets don’t like this and tend to respond with volatility. As such, a sell-off in ETH and other altcoins is just as likely in the near future as a surge. The outlook will be highly dependent on the result of the election and how the SEC’s attitude towards staking develops.

Being prepared for different outcomes at this stage is incredibly important for a successful investment or trading strategy, since the risk of ending up on the wrong side of the trade is simply too high when such binary outcomes are involved. What’s clear is that the SEC is almost certainly not done with its attempts to classify some parts of the crypto ecosystem as a security, and staking could turn out to be a compromise too far for the watchdog.

Lucas Kiely is a guest columnist for Cointelegraph and the chief investment officer for Yield App, where he oversees investment portfolio allocations and leads the expansion of a diversified investment product range. He was previously the chief investment officer at Diginex Asset Management, and a senior trader and managing director at Credit Suisse in Hong Kong, where he managed QIS and Structured Derivatives trading. He was also the head of exotic derivatives at UBS in Australia.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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