Crypto for Advisors: Decoding the Ether ETF Filings

U.S. SEC Chair Gary Gensler recently stated that he expects to see spot Ether ETFs available as early as September. Roxanna Islam, from VettaFi, decodes the issuer’s S-1 filings for these ETFs and discusses the progress made since the approvals of the spot bitcoin ETFs earlier this year.

In Ask an Expert, Eric Tomaszewski from Verde Capital Management answers common questions about the availability of Ether ETFs and why they matter to investors.

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Decoding S-1s for Spot Ether ETFs

For fans of crypto, ETFs, or both, the potential launches of spot ether ETFs have added to the excitement that began earlier this year with the spot bitcoin ETF launch. As potential approvals approach, there has been discussion about certain documents like 19b-4s and S-1s and their relevance. While a lot of their content is standard for SEC filings, there are several good takeaways hidden among the legal jargon. Based off S-1s and other industry data, here is what we know so far about spot ether ETFs.

What are 19b-4 and S-1 filings?

So-called 19b-4 documents are filed by exchanges (e.g., the New York Stock Exchange or NASDAQ) to inform the SEC of a proposed rule change. These filings are required to list a new type of ETF. Issuers were asked to amend their 19b-4s around May 20, during which most of the issuers removed provisions for staking. The SEC approved amended versions of these from eight issuers – VanEck, 21Shares, Grayscale, Fidelity, Invesco, iShares, Franklin and Bitwise – soon afterward, on May 23. (Later, ProShares also threw their hat into the ring.) While this means that the SEC will likely approve spot ether ETFs, we are still waiting on official approval for S-1s (registration statements) before these ETFs start trading. Spot ether ETF issuers have been filing amended S-1s in response to SEC comments – often a good sign that talks are progressing. Final approval will likely be within 90 days of the initial 19b-4 approvals, which means it could be sometime this summer (and likely sooner than later).

What do S-1s tell us about spot ether ETFs?

• Potential concentration in custodians. Like spot bitcoin ETFs, the majority of spot ether ETF issuers have chosen Coinbase as their custodian, which could cause concentration issues or a potential conflict of interest among competing products. Only VanEck and Fidelity have chosen custodians outside of Coinbase. (VanEck, however, expects to execute an agreement that would allow Coinbase to become an additional custodian.)

• Creation/redemption baskets vary among issuers. Larger issuers like iShares, Fidelity and VanEck will issue and redeem shares in blocks of 40,000, 25,000 and 25,000 respectively. Many of the other issuers will use baskets of 10,000.

• TBD on the fee war. Fees have so far been left blank (but logically, we could see fees go as low as they did for spot bitcoin ETFs).

• Risk factors look intimidating but should be approached rationally. The longest section in the S-1 is risk factors (50+ pages in some of the filings). But most of these are standard disclosures—risks of volatile markets, risks related to lack of demand, and risks related to new asset classes can be found in most stocks and ETFs.

• Investors need to weigh the pros and cons of ETF investment vs. direct investment. Investors may not receive some of the benefits related to spot ether ETFs. Investors would not have access to staking or to any “forked” or “airdropped” assets.

• Ark drops out of the spot ether race. Despite being a vocal player in the crypto ETF world, Ark pulled its name from its spot ether filing, leaving 21Shares as the sole issuer. Ark released a statement that they will be “evaluating efficient ways to provide [their] investors with exposure to [Ethereum] in a way that unlocks its full benefits.” This might be due to the lack of staking or the fact that fee wars have made spot bitcoin ETFs unprofitable.

• ProShares enters the spot ether race. Surprisingly, ProShares (who became a big name in crypto futures ETFs) did not launch a spot bitcoin ETF but was a late filer in the spot ether race. While traditional financial players like BlackRock and Fidelity may take significant market share again, ProShares may be able to take a chunk of that given its name recognition in the space.

Overall, we know more about spot ether ETFs than we did about spot bitcoin ETFs given the precedent set earlier in this year. As we look forward to potential spot ether ETF approval, we might see the pathway ahead for other crypto ETFs (i.e., Solana) become more clear.

Ask an Expert

Q: What excites you about an Ethereum ETF?

A: The recent initial approval of the first step for an Ethereum ETF represents a significant milestone for the digital asset industry, partly because it could create easier access for the average person.

In addition, final approval could create a regulatory framework for institutional adoption, which is a market estimated to be in excess of $100 trillion globally.

Bigger picture, an ETF launch could further the legitimacy of the asset class and overall acceptance, which would ultimately encourage more attention and inflows. This would be a big win for the validation of the digital asset space and future inclusion in diversified portfolios.

Q: What are some of the risks with an Ethereum ETF?

A: There is a concern that spot ETF approvals could potentially create massive players who could significantly influence validator power over time. The same applies for counterparty, centralization and concentration risks.

Q: What are some of the risks with Ethereum on-chain?

A: I believe that the risks differentiate more broadly when you consider Ethereum on-chain being used within different ecosystems and projects. This arguably creates technological, regulatory, financial, and security risks. All that said, risk is differentiated and rewarded.

Q: What are some opportunities or reasons someone should consider Ethereum on-chain?

A: Being on-chain opens a world of possibilities, permissionless innovation and inclusive financial services.

As an example, staking allows participants to earn rewards for their participation in securing the Ethereum network, which in some ways directly embodies the ethos of the Ethereum ecosystem and the community values.

Beyond staking, there are countless ways to support projects which may result in a range of benefits that go beyond monetary reasons. Community and culture are the cornerstones of the digital world. An ETF arguably misses many of these key attributes.

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Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.