Pundits worry SEC’s Ethereum probe could be used to hold back ETFs

The SEC’s reported investigation into the Ethereum Foundation could explain why the regulator hasn’t been forthcoming with prospective spot Ether ETF issuers, some suggest.

The reported probe into the Ethereum Foundation could be part of a “coordinated attack” on Ether (ETH) and may potentially be used as a reason to deny or delay spot Ether ETFs, according to industry pundits.

On March 20, Fortune reported that the United States Securities and Exchange Commission issued several subpoenas to companies that have worked with the Ethereum Foundation. Sources familiar with the matter said the commission had launched a campaign to classify ETH as a security in 2022.

“The SEC has no good reason to deny the ETH ETP applications,” argued Coinbase’s chief legal officer Paul Grewal in response to the news, noting that SEC Chair Gary Gensler once testified before Congress that Ether is not a security.

“We hope they won’t try to invent one by questioning the long established regulatory status of ETH, which the SEC has repeatedly endorsed. That’s not how the law works.”

“This now very obviously feels like a coordinated attack on ETH,” said Travis Kling, chief investment officer of Ikigai Asset Management, in a March 20 X post. “I wonder what’s gonna happen.”

Fox Business reporter Eleanor Terrett even suggested that the subpoenas could explain why the securities regulator has seemingly been reluctant to engage with prospective spot Ether ETF issuers.

The regulator’s seeming lack of engagement is one of the main reasons why Bloomberg ETF analysts Eric Balchunas and James Seyffart recently reduced their odds of an approved spot Ether from 70% to 25% by May.

Meanwhile, Patrick McHenry, Chair of the House Financial Services Committee, and others have shared disapproval of the reported move, saying it would be contrary to the regulator’s previous actions.

Reports indicate @GaryGensler is moving to unilaterally classify #ETH as a security.

This is contrary to the @CFTC's assessment and the @SECgov's prior actions.

Congress decides the SEC's jurisdiction and budget, Chair Gensler doesn't get to make it up as he goes along. https://t.co/83DUkCjMVA

— Patrick McHenry (@PatrickMcHenry) March 20, 2024

Brian Quintenz, a former commissioner of the Commodity Futures Trading Commission (CFTC) also argued that the SEC already “explicitly acknowledged” the non-security status of Ether last October when it approved Ether Futures ETFs.

However, Cardano’s founder Charles Hoskinson believes the SEC may have changed its mind on Ether’s security status after Ethereum transitioned to a proof-of-stake consensus mechanism in September 2022.

But Quintenz argued the SEC would have factored the Ethereum Merge into its decision to approve the Ether Futures ETFs as the former event occurred before the latter.

If Ether were a security, it would mean CFTC-listed Ether Futures ETFs would be illegal as any derivative of Ether would be considered a securities futures contract and thus be subject to different rules, Quintenz explained.

“It will be interesting to watch what, if any, excuse the SEC uses if it were to delay or deny an ETH ETF, given it has already informed the market on ETH being outside its jurisdiction,” added Quintenz.

Related: Prometheum claims Ether is a ‘digital asset security’ with launch of custody services

For now, the SEC has continued to delay its decision on spot Ether ETFs applications, punting them back to May or later.

Applicants include BlackRock, VanEck, ARK 21Shares, Fidelity and Invesco Galaxy, Grayscale and Hashdex and Franklin Templeton.

Bulchanas and Seyffart now predict the spot Ether ETFs will be denied but expect an approval will follow sometime before 2025.