Ether ETFs Are Approved by US Regulators, a Milestone for the Crypto Industry

(Bloomberg) -- US regulators have approved the first US exchange-traded funds investing directly in Ether, the world's second-largest cryptocurrency

(Bloomberg) -- Eight issuers including BlackRock Inc., Invesco Ltd. and Fidelity Investments were among those receiving the green light from the US Securities and Exchange Commission. Many of them were players during the debut of spot Bitcoin ETFs in January.

While crypto faithfuls have celebrated the milestone, many are not expecting blockbuster flows similar to that cohort of Bitcoin funds. Citigroup strategists in a note estimated that the Ether funds as a group could see inflows between $4.7 billion to $5.4 billion in the six months after they debut. By contrast, BlackRock’s Bitcoin ETF crossed the $1 billion threshold by itself less than a week into trading.

Here’s a quick guide to the approval and what it means for the digital-asset industry:

What is Ether?

Ether is the native token of Ethereum, the most commercially used blockchain, the decentralized ledgers that record transactions and provide proof of ownership that is the crypto world’s main innovation. Investors can earn passive income by temporarily making their tokens available to the Ethereum network to use in helping validate transactions, a process called staking. For technical reasons, taking that payout can be much simpler when staking through an ETF than directly.

What led to the approval?

The approval of spot Ether ETFs highlights a softening in the US regulatory climate for the digital-asset sector. A watershed legal victory for the industry last year has helped pave the way for the products.

The decision also offers more clarity on the status of Ether in the eyes of the SEC. Until now, the agency had often moved to block crypto’s expansion on the ground that many offerings constituted a security, meaning they should be regulated the way stocks and bonds and many other tradable assets are.

While SEC Chair Gary Gensler has argued that many digital assets are unregistered securities, he’s refused to say if Ether is part of that group. Bitcoin, the world’s largest digital asset, is the only cryptocurrency that Gensler has definitively said isn’t a security in his view. He regards it as a commodity.

The difference between Bitcoin and Ether in the eyes of the SEC lay in Ether’s staking mechanism. Putting money into a common pool and earning a return strikes many regulators as meeting the definition of a security. That meant that the applications for spot-Ether ETFs that proposed to allow staking were seen as unlikely to be approved.

But issuers subsequently vowed to keep the Ether they buy out of staking programs and said they wouldn’t invest in Ether-related derivatives. The SEC has not said what led to the approval, but these kinds of concessions likely played a role.

What can we expect?

BlackRock and Fidelity will likely attract the most volume and assets, wrote Bloomberg Intelligence strategists James Seyffart and Eric Balchunas, though they expect the Ether ETF flows over the next year to be around 20% of the Bitcoin ETF flows. That correlates to expectations of $5 billion to $6 billion of Ether ETF inflows.

Similar funds have done better outside the US in places including Hong Kong, Canada, Sweden and Switzerland, where spot Ether and Bitcoin ETFs recently launched. A key reason for the difference could be that other jurisdictions have ETFs that permit staking.