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SEC Remains Reticent on Ethereum ETF Approval - Is It Time to Raise a Red Flag?

Evaluating the odds: Bloomberg analyst lowers Ethereum ETF approval chances

The prospects for an Ethereum ETF have been a topic of much speculation within the investment community. Senior Bloomberg ETF analyst Eric Balchunas recently shared insights that may temper expectations. With the final decision deadline looming, Balchunas has revised the likelihood of approval to a mere 35%. A critical factor in this reassessment is the notable silence from the Securities and Exchange Commission (SEC). 

Balchunas explained:

"We’re 73 days from the final deadline and there’s been no contact or comments from the SEC to the issuers. That’s not a good sign," 

This absence of dialogue is unusual in the approval process, which typically involves back-and-forth communication to refine proposals. The silence suggests potential reluctance or complications that could hinder the approval process. As the crypto community watches closely, the countdown continues, with each silent day from the SEC raising more doubts about the future of Ethereum ETFs.

The silence from the SEC: a sign of growing uncertainty

The Securities and Exchange Commission's (SEC) lack of communication is casting a long shadow over the prospects of Ethereum ETFs. This radio silence is not just a procedural hiccup; it signals a deeper regulatory hesitation. Eric Balchunas, a seasoned ETF analyst at Bloomberg, has pinpointed the absence of SEC feedback as a major red flag. The process, as Balchunas detailed, involves a series of steps where the SEC's feedback is crucial for issuers to make necessary adjustments. 

The expectation of a dialogue is grounded in the norm that the regulatory body will provide comments, which then allows issuers to refine their applications. This standard procedure seems to be conspicuously missing in the case of Ethereum ETFs, suggesting a possible impasse that could jeopardize approval timelines and unsettle prospective fund issuers and investors.

Gensler’s stance and the political backdrop

Gary Gensler's perspective on Ethereum is critical in understanding the SEC's hesitance towards an Ethereum ETF. Eric Balchunas sheds light on Gensler's views, suggesting a complex mix of regulatory and political considerations. 

Balchunas elaborated:

"Gensler still thinks of Ether as a security and may be unwilling to endure another round of the 'political blowback' he received following the approval of the spot Bitcoin ETFs," 

This cautious stance is further complicated by the SEC's recent court loss to Grayscale in August 2023, which marked a significant moment in the regulatory landscape for cryptocurrencies. Balchunas interprets Gensler's position as protective, aiming to avoid further controversy in an already delicate regulatory environment. 

Balchunas adds, capturing the SEC Chair's possible reluctance to push forward with Ethereum ETFs without clear classification of Ether as a commodity akin to Bitcoin:

"I also feel like he feels like he threw the industry a bone. He ate crow with the court loss, and from his perspective, it’s like: ‘All right, you should be satisfied now,’" 

This cautious approach underscores the intricate balance between advancing crypto regulation and navigating the political ramifications of such decisions.

The bigger picture: potential impacts and industry perspectives

Despite the SEC's silence, the industry remains hopeful, looking for signs in related developments. In a March 11 post to X, ETF Store president Nate Geraci noted the oddity of the SEC approving several ETH futures ETF products in October but hesitating on spot products, highlighting a discrepancy in regulatory treatment that has left many puzzled.

Meanwhile, Consensys General Counsel Matt Corva sees a potential ETH ETF denial as a long-term positive, suggesting that it could force a reevaluation of regulatory standards for cryptocurrencies beyond Ethereum.

The anticipation has also been fueled by strategic meetings, such as the one between Coinbase, Grayscale, and SEC officials on March 6, discussing rule changes for spot Ether ETFs. However, the outcomes remain uncertain. Eric Balchunas pointed to a thesis from VB Capital's Scott Johnsson, emphasizing the meeting's focus on analytics rather than definitive steps toward approval, hinting at a more cautious regulatory approach.

As the November 5 U.S. Presidential election looms, Balchunas speculates on its potential to reshape the regulatory framework, depending on the election outcome. Regardless of the immediate decisions, there's a consensus that a spot Ether ETF is a matter of "when, not if," indicating a gradual but inevitable shift towards acceptance and integration of cryptocurrency products within the financial mainstream.