This is the SEC’s second decision regarding crypto Exchange-Traded Products. Earlier this year, in January 2024, the SEC, after a long battle, approved Bitcoin ETFs and ETPs. The exchanges had sought SEC approval for a rule change required to list these new products, which was successfully granted. However, trading will not start immediately, as issuers still need the SEC to approve individual ETF registration statements detailing investor disclosures. According to , industry participants said it was unclear how long the SEC’s approval process might take.
Representation of Bitcoin cryptocurrency is seen in this illustration photo taken in Krakow, Poland
In its accelerated approval, the SEC focused predominantly on the following aspects:
Reflecting on Section 6(b)(5) of the Exchange Act, the SEC emphasised the necessity of 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 common membership in the Intermarket Surveillance Group. However, the CME does not currently engage in surveillance of spot ether markets, raising concerns efficient oversight and the potential detection of fraud and manipulation. Even though spot ethers are not traded on the CME, the futures contracts are. Therefore, the high correlation between the futures and spot market means that price manipulations in the spot market will likely affect the futures market as well.
To show this correlation, the exchanges submitted correlation analyses aimed to determine whether price movements in the CME ether futures market closely align with those in the spot ether markets. This analyses are essential for evaluating whether the CME’s surveillance over the futures market can effectively detect and deter fraud and manipulation in the spot ether markets.
In addition to the analyses submitted by the applicants, the SEC carried out its own correlation analysis, reviewing the price data for CME ether futures and spot ETH/USD trading pairs on major platroms (Coinbase and Kraken) at hourly, five-minute, and one-minute intervals to capture different levels of trading activity over a lengthy period (from October 1, 2021 through March 29, 2024). The results of the SEC’s analysis confirmed that the CME ether futures market has been consistently highly correlated with this subset of the spot ether market throughout the past 2.5 years.
Further in its decision, the SEC analysed Section 11A(a)(1)(C)(iii) of the Exchange Act ensuring that the ether-based ETPs proposals provide sufficient protection for investors and maintain the integrity of the market.
Similarly to the Spot Bitcoin ETP Approval Order, there are several key requirements:
In the final part of SEC’s analysis, the Other Comments, the SEC included further discussions among commenters on investor protection, environmental considerations and volatility and risk concerns.
Regarding the volatility and risk concerns, one commenter raised concerns ether's price volatility, arguing that spot ether ETPs "would threaten retail investors and the broader financial system" by entangling the crypto industry with traditional finance. The SEC considered these potential benefits and concerns within the broader context, and concluded that they the proposals meet the Exchange Act requirements, including preventing fraud and manipulative acts.
When reading the response to this concern, the SEC ultimately left the issue unaddressed. The market volatility is inherent and potentially attractive to many investors, with the principle caveat emptor applying here. However, the major concern that the SEC and other supervisory authorities must focus on is the impact of merging crypto with traditional finance on the broader financial system as we know it. The gradual blending and introduction of multiple derrivative assets could have significant effects on the financial system - effcts that remain largely unexamined and unaddressed. Ignoring these potential consequences could lead to repeated 2007-2008 on a much larger scale.
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