The United States cryptocurrency exchange Coinbase has firmly supported Grayscale’s application to convert its Ethereum Trust into a spot Ether exchange-traded product (ETP). One of their key arguments is that Ether is not a security.
In a 27-page letter shared by Coinbase chief legal officer Paul Grewal on Feb. 22, the firm outlines the legal, technical, and economic rationale for why the U.S. Securities and Exchange Commission should approve an ETP based on Ether.
Coinbase makes five main arguments, including that Ether (ETH) should be classified as a commodity rather than a security. This is supported by the U.S. Commodity Futures Trading Commission’s approval of ETH futures, statements from SEC officials, and court rulings.
The firm also notes that the SEC has not objected to the CFTC’s treatment of ETH as a commodity. Grewal states, “Our letter makes clear what anyone who has been paying even the slightest attention to the subject knows: ETH is not a security.” He adds, “In fact, the SEC, CFTC, and the market have all treated ETH as a commodity before and after the Merge.”
The second argument in the letter is that the SEC’s approval of spot Bitcoin exchange-traded funds (ETFs) should also apply to an ETP based on Ether, if not even more strongly.
According to Coinbase, market data shows that ETH ownership and trading activity are highly dispersed, with a high level of liquidity and tight spreads, indicating a mature and efficient market.
The firm also argues that ETH futures ETFs are similar products to spot Ethereum-based funds, and it would be arbitrary for the SEC to approve one but not the other, given their close correlation.
Coinbase also highlights the strong technological and operational security mechanisms inherent in Ethereum’s blockchain, which significantly reduce the risk of fraud and manipulation.
Furthermore, the market depth, tight spreads, and price correlation across spot markets all suggest that the market for Ether is resilient to fraud and manipulation.
Lastly, Coinbase notes that they have sophisticated market surveillance in place to monitor trading on their platforms, as well as an agreement with the Chicago Mercantile Exchange.
The letter was filed in response to a proposed rule change by NYSE Arca to list and trade shares of the Grayscale Ethereum Trust as an ETP based on Ether. The SEC typically requests comments on proposed rule changes to gather feedback from the public before making a decision.
Concerns Raised Over Potential Risks of Ether ETFs in the Emerging Web 3.0 Landscape
In the rapidly evolving world of Web 3.0, the introduction of Ethereum-based ETFs has sparked concerns about potential concentration risks. Just recently, analysts from S&P Global warned that these ETFs, which include staking, could intensify concentration risks within the blockchain network.
Some of the applicants for spot Ethereum ETFs, such as ARK Invest and Franklin Templeton, are proposing to incorporate staking in their funds. However, S&P 500 managing director Andrew O’Neill noted that this could impact the mix of validators participating in the Ethereum network’s consensus mechanism.
According to data from Dune Analytics, Lido currently holds a significant 31.5% share of all staked Ethereum. This has raised concerns about the potential for a lack of diversity among validators, potentially compromising the network’s stability and security.
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