If SEC approves ether ETF, will it approve altcoin ETFs?

With the likelihood of the Securities and Exchange Commission (SEC) approving a spot ether ETF suddenly rising, altcoin investors are speculating on a possible flurry of approvals for additional coins.

Indeed, just this morning, WisdomTree gained approval from the UK Financial Conduct Authority to list its 100% physically backed Ethereum ETP on the London Stock Exchange as early as May 28 — although the products will not be available for retail investment.

The bullish momentum for ether, which is up 29% this week alone, might spill over into other crypto assets.

On Monday, Bloomberg ETF analysts James Seyffart and Eric Balchunas declared that the likelihood of the SEC approving a spot ether ETF had jumped from 25% to 75% thanks to the agency’s reported commentary to at least one exchange and one ETF applicant regarding their 19b-4 exchange rule change request.

The Wall Street Journal confirmed the news while CoinDesk also cited three people familiar with the matter. Around the same time and without citing 19b-4 news, David Han at Coinbase Institutional wrote a note adjusting his outlook for a spot ether ETF upward.

Barrons claimed staff workers at the SEC told exchanges “that it is leaning toward approving them, according to people familiar with the matter.”

As early as tomorrow, the SEC could approve a so-called 19b-4 filing that, alongside a related S-1 filing the deadline of which is weeks away, might lead to an eventual listing of a spot ether ETF by investment manager VanEck.

Other ETF sponsors have also filed 19b-4 applications with the SEC for a spot ether ETF, including Fidelity, 21Shares, Invesco/Galaxy, and Franklin Templeton. VanEck requested the earliest response date: tomorrow.

Will a spot ether ETF lead to other altcoin ETFs?

Certainly, ether is just one of many altcoins trading on US stock exchanges via trusts. There are over a dozen trusts publicly trading in the US holding alternate crypto assets: Litecoin (LTC), Chainlink (LINK), Basic Attention Token (BAT), Bitcoin Cash (BCH), Decentraland (MANA), Ethereum Classic (ETC), Filecoin (FIL), Polkadot (DOT), Horizon (ZEN), Stellar Lumens (XLM), Livepeer (LPT), Zcash (ZEC), and Solana (SOL).

So, if the SEC approves a spot ether ETF, could it also approve ETFs for additional altcoins?

The logic of altcoin proponents — arguing that non-ether spot altcoin ETFs might gain SEC approval shortly after a spot ether ETF — usually follows a simple argument: If the SEC permitted Grayscale to convert its bitcoin trust into an ETF, why would commissioners deny trust sponsors of other crypto assets to convert into an ETF?

For obvious reasons, that argument might fail if the SEC claims the crypto asset is an unregistered security. However, the SEC hasn’t classified all crypto assets held in US public trusts as securities.

Interestingly, many crypto trusts trading on OTC Markets, a US stock exchange, hold expressly SEC-designated unregistered securities, including SOL, MANA, and FIL. More crypto assets are rumored to be SEC-designated unregistered securities: ZEN, XLM, and ZEN. 

Nevertheless, there are certain trusts trading on US OTC Markets that don’t hold SEC-designated unregistered securities, such as DOT or ETC trusts. Perhaps, if the SEC were to approve a spot ether ETF, commissioners might approve spot ETFs based on such possibly non-security crypto assets.

It’s worth noting that just because the SEC hasn’t classified a crypto asset as an unregistered security doesn’t mean that it’s not. Congress didn’t task the SEC to proactively classify all assets. Instead, the SEC simply chooses to accept or reject applications that it receives, or file enforcement actions against illegal conduct on a case-by-case basis, as it has the time, money, staff, and resources.

Silence from commissioners doesn’t indicate non-designation.

Of course, there is a counterargument against this logic. Unlike altcoins like DOT or ETC, only bitcoin and ether have futures contracts listed on the Chicago Mercantile Exchange (CME). This CME market of significant size for ether alone might be a carrying reason for approving only a spot ether ETF and not any other altcoin.

Spot ether ETF: No longer an obvious SEC rejection?

According to reports from Bloomberg, Barron’s, and Wall Street Journal sources, the Trading and Markets Division at the SEC has requested amendments to an exchange and sponsor’s joint 19b-4 form — likely VanEck. This is a bullish sign for a possible spot ether ETF approval because, in the view of market observers, the SEC is typically silent or disinterested in 19b-4 filings if it intends to reject them.

Because the SEC is asking for a reapplication, the reasoning goes, its interest is likely a positive development.

Many viewed the SEC’s stance toward a spot ether ETF as decidedly negative. Joe Lubin’s ConsenSys even sued the SEC claiming that commissioners had secretly categorized ether as an unregistered security.

Therefore, if the SEC is actually considering a possible approval of a spot ETF for Ethereum, it would be a marked change of tone.

Read more: ConsenSys says the SEC designated ETH a security but won’t say where

Amid all of these media reports, the price of ether has rallied by 29% over the past seven days — outperforming bitcoin’s 12% rally by an additional 17%.

Form 19b-4 asks applicants for the information necessary for the public to understand why the SEC should change its Section 19(b)(1) rules pursuant to the Securities Exchange Act of 1934. In this case, the exchange and an ETF sponsor must explain why the SEC should allow ether to be used as the sole asset of a spot ETF.

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