Forbes: Why ETH ETFs Might Be Delayed?

Original Title: WhyAnETHETFMightBeDelayedAfterAll

Original Author: SeanSteinSmith

Original Translation: Yvonne, Mars Finance

Given that most crypto assets have made breakthrough developments this year, we have reason to believe that the cryptocurrency market will continue to mature. From any perspective within the cryptocurrency industry, 2024 is a year of price rebound, and the confidence of both institutional and retail investors has been restored. The warming market sentiment has fueled public opinion around the likelihood of ETH ETF approval. After all, following years of various institutional applications being rejected, there are currently 11 Bitcoin ETFs trading in the U.S. While capital flows may have slowed, this slowdown occurred after Bitcoin rapidly rose to become one of the largest ETF underlying assets globally.

ETH remains the second-largest cryptocurrency in the world and is the most important blockchain token in the cryptocurrency market, making the timing for an ETF seem ripe. Setting aside price volatility, the legitimacy created by Bitcoin ETFs in the TradFi space is significant; after years of neglecting this asset class, the allocation and investment of billions of dollars in 2024 cannot be overlooked. El Salvador has been a long-time buyer of Bitcoin, and the country has moved most of its holdings into a cold wallet, securing them in a safe location within its sovereign territory.

Given all these positive trends, the approval of an ETH ETF seems like a foregone conclusion. But now let’s look at why this optimism should be tempered.

SEC

Under the leadership of Chairman Gary Gensler, anti-crypto sentiment seems to have dominated the committee's dialogue, with a recent example being evidence that several U.S. companies are under investigation for dealings with the Ethereum Foundation. These recent investigations followed a statement from the SEC classifying proof-of-stake blockchains (and related tokens) as investment contracts, as well as lawsuits against exchanges like Coinbase and Kraken, focusing on the staking-as-a-service offered to investors.

By focusing on the Ethereum Foundation, the SEC has indeed gathered information that can be used to build a case for classifying Ethereum as a security. The foundation has issued tokens to fund further development, with some tokens allocated to founders, and the work of the foundation is related to increasing the value of the aforementioned tokens. Unlike Bitcoin, there is a founding/management team involved in promoting and further developing the Ethereum blockchain. Regardless of the opposition the SEC continues to face or the issues that unilateral actions may bring, the committee seems poised to continue these efforts.

Staked ETH vs. Non-Staked ETH

While some staking services offered by exchanges have indeed sparked lawsuits and fueled the SEC's case for classifying ETH as a security, this may also be a factor that diminishes the appeal of a spot ETH ETF. With Ethereum's average yield slightly below 4%, this opportunity is attractive to retail investors, but it will be of greater concern for institutional pools of capital that must manage investor expectations for stable returns. Given that inflation rates remain above pre-2020 levels, the yield generated by ETH will continue to attract attention.

On the other hand, the appeal of this yield, as well as staking in general, is one of the core arguments the SEC is using to build its recent case for classifying ETH as a security. Since ETH staking involves centralization (whether through centralized exchanges or decentralized protocols), profit-seeking joint efforts, and limited direct participation from most staking participants, this argument is not entirely unfounded.

The ongoing attraction of ETH to investors may also pose another obstacle to the approval of a spot ETF.

The Success of Bitcoin ETFs is a Dilemma

Finally, the success of multiple spot Bitcoin ETFs has reignited criticism and backlash from U.S. policymakers. New efforts to combat the energy consumption of Bitcoin miners, the possibility of re-imposing a 30% target tax on those miners, and concerns over price volatility continue to intensify public debate, undermining demand for more crypto ETFs.

While cryptocurrency investors and advocates cheer for higher prices, increasing traffic and trading volumes, and more users entering the space, these positive trends are being used to argue against further development.

In 2024, there is much for the cryptocurrency industry to celebrate, but these same successes may actually hinder more positive news.