On March 23, 2024, the Securities and Exchange Commission (the “SEC”) formally announced its approval of eight “Ether-Based Exchange Traded Products” (the “ETPs”).1 This announcement comes a little over four months after the SEC approved Bitcoin ETPs. The eight approved ETPs include (1) the Grayscale Ethereum Trust, (2) the Bitwise Ethereum ETF, (3) the iShares Ethereum Trust, (4) the VanEck Ethereum Trust, (5) the ARK 21Shares Ethereum ETF, (6) the Invesco Galaxy Ethereum ETF, (7) the Fidelity Ethereum Fund, and (8) the Franklin Ethereum ETF.2
Ether (“ETH”) is the native token of the Ethereum Network, the second largest cryptocurrency by market cap after Bitcoin.3 Approval of the ETH ETPs is another step towards mainstream recognition and adoption of cryptocurrencies. The adoption of ETH may be more significant than that of Bitcoin as the Ethereum Network provides users the ability to build and scale protocols on its network with a vast number of potential use cases, whereas Bitcoin is mainly used as a store of value. Increased exposure to ETH will inevitably lead to greater exposure for Ethereum products. As of May 24, 2024, the Bitcoin ETPs saw over $272.28 billion in overall trading volume.4 It remains to be seen whether the ETH ETPs can replicate such volume, though it is likely that they will not, at least not at first. Asset allocators and institutions took many years to get comfortable with Bitcoin’s value proposition (scarcity, immutability, sound money, etc.), not to mention the many years of ETF applications and rejections. The simple fact is that such institutions and managers are not as familiar with Ethereum now as they were with Bitcoin in January. In the long run, however, Ethereum’s turning complete features make it a much more powerful form of “programable money” and it would not be surprising if institutional and retail investors ultimately see as much, or more, value in the asset.
On the other hand, some may argue that these ETPs are inconsistent with the decentralized nature of cryptocurrencies. A similar concern was raised when Lido was responsible for almost one-third of the staking taking place on the Ethereum Network.5 Decentralization helps ensure that the Ethereum Network is not controlled by a few users. Conversely, the ETPs require these large asset managers to accumulate huge quantities of ETH. For now, these asset managers cannot stake their ETH or participate in the governance of the Ethereum Network, however, if given such opportunities, these asset managers could theoretically threaten the decentralized nature of the Ethereum Network and/or place the entire network under the control of the US government.
As these ETPs are brand new, we will have to wait to see how their adoption impacts cryptocurrencies and traditional finance.
