Information about the SEC decision

Information about the SEC decision

The US Securities and Exchange Commission (SEC) approved the sale of spot Ether exchange-traded funds (ETFs) in the United States on May 23, 2024. The SEC combined proposals from the exchanges Nasdaq, NYSE and CBOE, which requested changes to existing rules to allow trading of Ethereum exchange-traded products (ETPs) and ETFs.

This is the SEC’s second decision 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 requested SEC approval for a rule change required to include these new products, which was successfully granted. However, trading will not begin immediately, as issuers still need the SEC to approve individual ETF registration statements detailing investor disclosures. According ReutersIndustry participants said it was unclear how long the SEC approval process could take.

SEC Concerns

In its accelerated approval, the SEC predominantly focused on the following aspects:

Fraud and manipulation prevention: the importance of CME

In reflecting on Section 6(b)(5) of the Exchange Act, the SEC emphasized the need for comprehensive shared surveillance arrangements with the Chicago Mercantile Exchange (CME) to detect and prevent fraud and manipulation. Each exchange maintains a comprehensive co-surveillance agreement with the CME through its common membership in the Intermarket Surveillance Group. However, the CME is not currently involved in monitoring the ether spot markets, raising concerns about efficient oversight and potential detection of fraud and manipulation. Although spot ethers are not traded on the CME, futures contracts are. Therefore, the high correlation between the futures market and the spot market means that price manipulations in the spot market will likely affect the futures market as well.

To show this correlation, exchanges presented correlation analyzes aimed at determining whether price movements in the CME ether futures market closely align with those in the spot ether markets. These analyzes are essential to assess whether the CME’s surveillance of the futures market can effectively detect and deter fraud and manipulation in the ether spot markets.

In addition to the analyzes presented by the petitioners, the SEC conducted its own correlation analysis, reviewing price data for CME ether futures and ETH/USD spot trading pairs on major platforms (Coinbase and Kraken) each hour, five minutes, and one-minute intervals to capture different levels of trading activity over an extended period (from October 1, 2021 to March 29, 2024). The results of the SEC analysis confirmed that the CME ether futures market has been consistently highly correlated with this subset of the spot ether market for the past 2.5 years.

Investor protection and market integrity

Later in its decision, the SEC analyzed Section 11A(a)(1)(C)(iii) of the Exchange Act ensuring that ether-based ETP proposals provide sufficient protection to investors and maintain market integrity .

Similar to the Bitcoin Spot ETP Approval Order, there are several key requirements:

  • The availability of pricing information. – the availability of information on quotes and last sale for each ETP through the securities information processor; the availability of intraday indicative values ​​(IIVs) and net asset values ​​on each ETP’s website; and the dissemination of IIV by the main market data providers, updated every 15 seconds during normal business hours;
  • Transparency of portfolio holdings – ETPs must periodically disclose their portfolio holdings, including the amount of ether and any cash or cash equivalents they hold. This information generally needs to be updated daily and available on the ETP website and other major financial information platforms;
  • Surveillance Procedures and Shared Surveillance Agreements – Similar to agreements with CME, exchanges should have data sharing agreements to share information with other regulated markets, improving the ability to detect and deter fraudulent and manipulative practices. Additionally, exchanges must specify the conditions under which they would implement trading interruptions and suspensions.

Other concerns: volatility and risk

In the final part of the SEC’s analysis, the Other commentsThe SEC included further discussion among commenters about investor protections, environmental considerations, and concerns about volatility and risk.

Regarding concerns about volatility and risk, one commentator expressed concern about the volatility of ether prices, arguing that ether spot ETPs “would threaten retail investors and the financial system in general” by entangling the crypto industry with traditional finance. The SEC considered these potential benefits and concerns within a broader context and concluded that the proposals meet the requirements of the Exchange Act, including the prevention of fraud and acts of manipulation.

Upon reading the response to this concern, the SEC ultimately left the issue unaddressed. Market volatility is inherent and potentially attractive to many investors, with the principle caveat emptor applying here. However, the main concern that the SEC and other supervisory authorities should focus on is the impact of the merger of cryptocurrencies with traditional finance on the broader financial system as we know it. The gradual blending and introduction of multiple derivative assets could have significant effects on the financial system, effects that remain largely unexamined and unaddressed. Ignoring these potential consequences could lead to a repeat of the 2007-2008 period on a much larger scale.