SEC Approves Listing of Spot Ethereum ETFs
Commentary by Steven Lofchie
The SEC approved applications from CBOE, Nasdaq and NYSE to list exchange-traded funds ("ETFs") tied to the price of ether.
In the proposals, the relevant exchanges made clear that they would subject the ETF to their rules governing "Commodity-Based Trust Shares." In the Order, the SEC defined ether as "a digital asset that is native to, and minted and transferred via, a distributed, open-source protocol used by a peer-to-peer computer network through which transactions are recorded on a public transaction ledger known as 'Ethereum,'" and that "the Ethereum protocol governs the creation of new ether and the cryptographic system that secures and verifies transactions on Ethereum."
In approving the ether trust to be listed on an exchange, the SEC found that the proposals were consistent with rules "designed to prevent fraudulent and manipulative acts and practices" and "to protect investors and the public interest." As stated in the Order, "[t]he Commission believes that it is appropriate to approve all of the proposals at the same time in order to foster competition by potentially providing investors with several spot ether-based ETPs from which to choose. The shares of any Trust, however, may not begin trading on its applicable Exchange unless and until its corresponding registration statement becomes effective."
Commentary
This Order is arguably the most legally significant development during the Chair Gensler era with respect to digital assets. It is a concession that ether is not a security. And yet, to read the SEC's release approving the exchanges' listing applications, one might reasonably conclude that the SEC never had suggested, even remotely, that ether might be a security. Apparently, the topic did not deserve a sentence, not even a footnote.
"Like must be treated as like" is one of Chair Gensler's favorite aphorisms, which he generally uses to argue that all digital assets must be securities. But if "like must be treated as like," and if ether is not a security, it likewise follows that there are other digital assets that are not securities — surely ether is not unique, is not like nothing else.
While the SEC was able to avoid explaining how it concluded that ether is not a security in the Order, it will undoubtedly be forced to justify itself in the various litigations that it has brought asserting that other cryptocurrencies are securities. How is it that those cryptocurrencies are not like ether? In the absence of any rationale, the SEC will have put its litigation agenda in something of a shambles.
The Order makes it a great day for digital asset enthusiasts, and the conclusion is generally regarded as the right answer on the law as to the characterization of ether. However, the absence of any explanation by the SEC, the very material omission of any explanation of how the SEC reached that result, makes it a bad day for the SEC in its role as arbiter of transparency and disclosure.
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