Ethereum
Overview of the SEC decision
The United States Securities and Exchange Commission (SEC) approved the sale of cash exchange-traded funds (ETFs) in the United States on May 23, 2024. The SEC combined proposals from the Nasdaq, NYSE and CBOE exchanges, which called for changes to existing rules to allow trading in ‘Ethereum Exchange- Listed Products (ETPs) and ETFs.
This is the SEC’s second ruling regarding exchange-traded crypto products. Earlier this year, in January 2024, the SEC, after a long battle, Approved Bitcoin ETFs and ETPs. The exchanges had sought approval from the SEC for a rule change necessary for the listing of these new products, which was successfully obtained. However, trading will not begin immediately, as issuers still need the SEC to approve individual ETF registration statements detailing the information provided to investors. According to ReutersIndustry participants said it was unclear how long the SEC approval process might take.
The representation of the cryptocurrency Bitcoin is visible in this illustrative photo taken in Krakow, Poland… [+] on April 19, 2022. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
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SEC Points of Concern
In its expedited approval, the SEC primarily focused on the following aspects:
Prevention of fraud and manipulation: the importance of CME
In reflecting on Section 6(b)(5) of the Exchange Act, the SEC emphasized the need for comprehensive surveillance sharing agreements with the Chicago Mercantile Exchange (CME) to detect and deter fraud and manipulation. Each exchange maintains a comprehensive surveillance sharing agreement with the CME through their joint membership in the Intermarket Surveillance Group. However, the CME does not currently engage in monitoring of ether spot markets, raising concerns about the effectiveness of monitoring and the potential detection of fraud and manipulation. Even though spot ethers are not traded on the CME, futures are. Therefore, the top correlation between the futures market and the spot market means that price manipulations in the spot market will likely also affect the futures market.
To show this correlation, exchanges have submitted correlation analyzes aimed at determining whether price movements in the CME ether futures market closely align with those in the ether spot markets. These analyzes are critical to assessing whether CME oversight of the futures market can effectively detect and deter fraud and manipulation in ether spot markets.
In addition to the analyzes submitted by the plaintiffs, the SEC conducted its own correlation analysis, examining price data for CME ether futures and ETH/USD spot trading pairs on major platforms (Coinbase and Kraken ) every hour, five minutes, and one-minute intervals to capture different levels of business activity over a long period of time (October 1, 2021 to March 29, 2024). The results of the SEC analysis confirmed that the CME ether futures market has consistently been highly correlated to this subset of the ether spot market over the past 2.5 years.
Investor protection and market integrity
Further in its decision, the SEC analyzed Section 11A(a)(1)(C)(iii) of the Exchange Act, ensuring that proposed ether-based ETPs provide sufficient protection for investors and maintain market integrity.
Like the Spot Bitcoin ETP Approval Order, there are several key requirements:
- Availability of pricing information – the availability of quotation and last sale information for each ETP via the securities information processor; the availability of intra-day indicative values (IIV) and net asset values on the website of each ETP; and the dissemination of the IIV by major market data providers, updated every 15 seconds during normal trading hours;
- Transparency of portfolio holdings – ETPs must regularly disclose their portfolio holdings, including the amount of ether and any cash or cash equivalents held. This information must generally be updated daily and made available on the ETP website and other major financial information platforms;
- Surveillance procedures and surveillance sharing agreements – Similar to the agreements with CME, exchanges must establish data exchange agreements to share information with other regulated markets, thereby improving the ability to detect and deter fraudulent and manipulative practices. Additionally, exchanges must specify the conditions under which they will implement trading halts and suspensions.
Other concerns: volatility and risk
In the final part of the SEC’s analysis, the Other Comments, the SEC included more in-depth discussions among commenters on investor protections, environmental considerations, and volatility and risk concerns.
Regarding volatility and risk concerns, one commenter expressed concerns about ether price volatility, arguing that ether spot ETPs would “threaten retail investors and the financial system as a whole » by blending the crypto industry with traditional finance. The SEC considered these potential benefits and concerns in a broader context and concluded that the proposals met the requirements of the Exchange Act, including the prevention of fraud and manipulative acts.
Upon reading the response to this concern, the SEC ultimately left the issue unaddressed. Market volatility is inherent and potentially attractive to many investors, so the caveat applies here. However, the main concern that the SEC and other supervisory authorities need to focus on is the impact of crypto’s merger with traditional finance on the broader financial system as we know it. The gradual mixing and introduction of multiple derivative assets could have significant effects on the financial system – effects that remain largely unexamined and unresolved. Ignoring these potential consequences could lead to a repeat of 2007-2008 on a much larger scale.