Recent Events Analysis of Ethereum: Impact of Hong Kong Cryptocurrency ETF, Prospects of US ETH ETF, Will ETH be Classified as a Security?

Author: Ebunker

Hong Kong Virtual Asset Spot ETF

On April 30, Bosera HashKey, Huaxia, and Jia Shi jointly launched a total of 6 virtual asset spot ETFs under the Hong Kong Stock Exchange and opened for trading. These include Bosera HashKey Bitcoin ETF (3008.HK), Bosera HashKey Ethereum ETF (3009.HK), Huaxia Bitcoin ETF (3042.HK), Huaxia Ethereum ETF (3046.HK), Jia Shi Bitcoin Spot ETF (3439.HK), and Jia Shi Ethereum Spot ETF (3179.HK).

Li Yimei, CEO of Huaxia Fund, stated in an interview with Bloomberg TV that the launch of Hong Kong spot Bitcoin and Ethereum ETFs "has opened the door for many RMB holders to seek alternative investments. With the development of openness, it is hoped that mainland Chinese investors will have new opportunities to participate in this process in the future." (Note: Currently, the ETFs launched in HK are only applicable to Hong Kong residents.)

However, from a data perspective, the first-day trading situation of Hong Kong virtual asset spot ETFs was less than satisfactory, with a total trading volume of 87.58 million Hong Kong dollars (12 million US dollars) for the 6 Bitcoin + Ethereum spot ETFs. In comparison, the first-day trading volume of the US Bitcoin ETF was 4.6 billion US dollars. Despite the less-than-ideal first-day trading data, it still opened the door to alternative assets for Hong Kong investors, and the market will increasingly accept such financial products. Some industry insiders believe that due to the poor performance of the Chinese stock market and the continued volatility of the real estate market, in the medium to long term, China's high-net-worth individuals may invest in Hong Kong's encrypted asset ETFs through various channels.

Prospects of the US ETH Spot ETF

Recently, asset management company Franklin Templeton listed its spot Ethereum ETF on the website of the Depository Trust & Clearing Corporation (DTCC), labeled as EZET. Theoretically, including this ETF on the DTCC website represents the first step in the trading process. However, this does not guarantee approval from the SEC, as the SEC will ultimately decide whether the ETF can be launched.

The DTCC website typically displays securities that meet trading and settlement requirements, including ETFs that meet specific registration or compliance requirements. Although this list does not directly impact the SEC's decision, it does help adjust ETFs to meet market demand, thereby helping to keep the market price of the ETF close to its Net Asset Value (NAV).

In February of this year, similar to BlackRock, Grayscale, Vaneck, and Ark Invest, Franklin Templeton submitted an application to the SEC for an ETH spot ETF. However, the SEC recently delayed the decision on Franklin Templeton's ETF application, citing the need to review proposed rule changes for listing and trading shares on the CBOE BZX Exchange. The SEC has an additional 45 days, until June 11, for further evaluation.

Compared to Bitcoin ETFs, the outlook for Ethereum ETFs is less optimistic. Bloomberg ETF analyst Eric Balchunas estimates the likelihood of the SEC approving an Ethereum ETF in May to be around 35%. He believes that compared to the Bitcoin ETF application process, the SEC has been less active, indicating a strategic move rather than just a delay. In addition, SEC Chairman Gary Gensler's increased stance on Ethereum potentially being classified as a security has added complexity to the decision-making process.

JPMorgan analysts predict that regulatory approval for spot Ethereum ETFs will continue to be delayed, with the approval possibly ending up in legal battles, similar to Grayscale's lawsuit, prompting the SEC to reconsider spot Bitcoin ETF applications.

The SEC's approval of Ethereum futures ETFs has long been used as an argument for approving spot Ethereum ETF applications. Grayscale believes that SEC-approved Bitcoin futures ETFs carry the same risks as Bitcoin spot ETFs, so after Grayscale won a legal battle against the SEC in August 2023, this argument was strengthened. Van Buren Capital believes that the SEC may approve spot Ethereum ETFs to avoid another defeat in court but is more likely willing to take another gamble in court.

Despite challenges, US investors and companies are still striving for the approval of spot Ethereum ETFs, as establishing connections between cryptocurrency and traditional financial products is seen as a significant step forward. It is currently unclear what action the SEC will take, but if spot Ethereum ETFs are approved, US regulators will take a more progressive stance on cryptocurrencies.

Will ETH be Classified as a Security?

Fox Business recently reported that according to court documents filed by Ethereum software giant Consensys, SEC Chairman Gary Gensler has been attempting to classify Ethereum as an unregistered security not compliant with current federal regulations for at least 1 year. Consensys is challenging the SEC's attempt to reclassify Ethereum as a security through litigation.

According to the documents, on March 28, 2023, SEC Enforcement Division head Gurbir Grewal approved a formal investigation order for "ETH 2.0," authorizing SEC staff to investigate and subpoena individuals involved in ETH transactions.

The FOX report notes that the SEC is determined to keep the investigation confidential, with sources who received subpoenas forced to sign nondisclosure agreements. As one of the companies that received an SEC subpoena, Consensys preemptively filed a lawsuit against the SEC last week, revealing that earlier this month, they also received a "Wells Notice" from the SEC, possibly related to potential enforcement actions involving their MetaMask Swaps and staking services.

(Note: A "Wells Notice" is an informal reminder issued by the SEC to publicly traded companies before civil litigation, allowing notified companies to communicate and negotiate with the SEC before receiving formal litigation.)

Historically, SEC Chairman Gensler has not taken a clear stance on whether ETH is considered a security. In April 2023, Congressman Patrick McHenry asked him during a congressional hearing whether ETH is a security, to which Gensler refused to answer, attempting to conceal the SEC's preliminary determination to classify ETH as a security.

On April 30, Chairman of the House Financial Services Committee Patrick McHenry commented on the &nb

The escalating dispute between the SEC and the cryptocurrency industry accuses SEC Chairman Gary Gensler of "intentionally misleading Congress about the SEC's position on Ethereum, as shown in new court documents, which is an intentional attempt to distort the SEC's position." He points out that there is a clear disconnect between the SEC's public statements and its private actions towards ETH, reflecting the arbitrary and capricious nature of SEC regulation of digital assets.

As of 2018, the SEC's position on Ethereum was relatively clear: Ethereum is not a security. At least, that was the stance articulated by the SEC's Director of Corporation Finance at the time, Bill Hinman, and the then SEC Chairman Jay Clayton in their speeches. However, after the current SEC Chairman Gary Gensler took office, there has been a subtle shift in the agency's position on Ethereum. Shortly after Ethereum transitioned to a PoS consensus mechanism in 2022, Gensler stated that in PoS blockchains, users lock up their tokens to ensure network security and receive token rewards, which constitutes an investment contract and can be classified as a security, but he did not specifically mention ETH.

Under Gensler's leadership, the SEC has taken enforcement actions against several cryptocurrency exchanges, including Coinbase, Kraken, and Binance, for selling unregistered securities like Cardano's ADA and Solana's SOL to U.S. customers. However, Ethereum has never been directly classified as a security in any previous SEC litigation.

Cosensys believes this is a deliberate "power grab" by the SEC. Cosensys is challenging the SEC's actions on two fronts: first, insisting that Ethereum does not meet the definition of a security and is therefore not subject to such regulations, and second, accusing the SEC of unfairly targeting its MetaMask product.

The SEC has chosen not to comment on these ongoing legal proceedings. Ebunker believes that the case reflects the uncertain regulatory environment for cryptocurrencies in the United States and may impact the future classification of Ethereum. Many industry insiders believe that the SEC's current attempt to classify ETH as a security is a strategic move aimed at gaining regulatory authority over ETH and other tokens suspected of being securities. As the second-largest blockchain by market capitalization and the platform for most mainstream DeFi, DAO, and NFT projects, reclassifying ETH as a security would undoubtedly have a significant impact on the entire cryptocurrency industry.