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Coinbase Pushes for the Approval of Ethereum ETF, Pointing to Its Non-Security Status

Coinbase wants faster Ethereum ETF approval since the underlying cryptocurrency isn’t classified as a security by the SEC 

United States cryptocurrency exchange, Coinbase, has thrown its full support behind Grayscale's endeavor to transform its Ethereum Trust into a spot Ether exchange-traded product (ETP). This backing is grounded on a firm belief that Ethereum (ETH), with its current valuation at $3,025, rightfully belongs in the commodity category, not as a security. This stance is further bolstered by the U.S. Commodity Futures Trading Commission's green light for ETH futures, alongside affirmations from SEC officials and judicial verdicts.

In a detailed 27-page missive to the U.S. Securities and Exchange Commission, Coinbase's Chief Legal Officer, Paul Grewal, elucidated the legal, technical, and economic pillars supporting this claim. Grewal emphasized:

"Our letter lays out what anyone knows who’s paid even the slightest bit of attention to the subject: ETH is not a security." 

This assertion is reinforced by the seamless classification of ETH as a commodity in various regulatory and market contexts.

Legal and market rationale for Ether ETP

Coinbase's advocacy for an Ether-based exchange-traded product (ETP) is underpinned by compelling legal and market analyses. Chief among these is the assertion that the Securities and Exchange Commission's (SEC) previous green light for Bitcoin ETFs logically extends to Ethereum ETPs. This argument is fortified by the dispersed nature of ETH ownership, a fact underscored by market data revealing high liquidity and narrow spreads—hallmarks of a mature and efficient market.

Paul Grewal, in his communication with the SEC, highlighted Ethereum's technological and operational security features that significantly mitigate the risk of fraud and manipulation. 

 Grewal stated:

"In fact, before and after the Merge, the SEC, the CFTC, and the market have treated ETH not as a security but a commodity,"

Coinbase further contrasts ETH futures ETFs with spot Ethereum-based funds, criticizing the inconsistency of approving one while potentially denying the other. Such a stance, Coinbase argues, overlooks the tight correlation between these products.

Ethereum's market resilience and surveillance

Coinbase not only championed the Ethereum ETP but also meticulously outlined Ethereum's market robustness and the comprehensive surveillance mechanisms it employs. 

Coinbase articulated:

"The asset’s market depth, tightness of spreads, and price correlation across spot markets are highly indicative of a market that is resilient to fraud and manipulation,"

Coinbase's argument is rooted in the belief that Ethereum's blockchain technology, especially its proof-of-stake consensus mechanism, inherently limits the cryptocurrency's susceptibility to fraudulent activities and market manipulation. 

The letter highlighted:

"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," 

Additionally, Coinbase underscored its sophisticated market surveillance capabilities, including an agreement with the Chicago Mercantile Exchange, to monitor trading activities on its platform effectively. This level of vigilance further solidifies the case for Ethereum's market integrity and the feasibility of an Ether ETP.

Concerns over concentration risk in Ethereum ETFs

Despite Coinbase's strong advocacy for Ethereum ETPs, notable concerns regarding potential 'concentration risk' have been raised by analysts at S&P Global. Specifically, the introduction of spot Ethereum ETFs that permit staking might inadvertently centralize control within the Ethereum network. 

Andrew O’Neill, managing director at S&P 500:

"An increase in ether staking ETFs could affect the mix of validators participating in the Ethereum network’s consensus mechanism," 

This apprehension is further compounded by proposals from entities like ARK Invest and Franklin Templeton, which suggest allowing fund staking. Such moves could potentially shift the current validator landscape, dominated in part by the Lido decentralized staking protocol, which commands a 31.5% share of all staked Ethereum, according to Dune Analytics. 

O’Neill expresses concern that while diversifying away from Lido might reduce existing concentration, it could also usher in new risks if 

"a single entity is chosen to stake the bulk of ether included in these ETFs."

This discourse underlines a critical aspect of Ethereum ETF proposals: the imperative to balance innovation in financial products with the safeguarding of Ethereum's foundational principles of decentralization and security.