On 23 May 2024 the SEC approved the rules that let three US exchanges list spot ether funds, though none is trading yet. What these funds are and which risks are worth knowing.
On 23 May 2024 the SEC, the US securities regulator, approved the rule changes that three exchanges (NYSE Arca, Nasdaq and Cboe BZX) had filed in order to list funds that hold spot ether. There are eight proposals, linked to funds from Grayscale, Bitwise, BlackRock (iShares), VanEck, ARK 21Shares, Invesco Galaxy, Fidelity and Franklin Templeton. The decision came a little over four months after the bitcoin funds were approved and surprised the market, which only days earlier had expected a rejection.
What exactly did the SEC approve?
It helps to separate two steps. What the SEC approved was the change to the exchanges’ rules, without which they could not list these products. But the shares of each fund cannot start trading until its registration statement, the document that explains how the fund works, what fees it charges and what risks it carries, is declared effective. In January, with bitcoin, both steps were settled at once and the funds traded the next day; this time the second step was still pending, and the SEC has no set deadline for it.
The SEC based its decision on the prevention of fraud and manipulation. It acknowledged that spot ether is not traded on the CME futures market and is not monitored by it, but concluded that other means are sufficient, among them the close correlation between the price of ether futures and the price on trading platforms. It also noted that the proposals do not contemplate staking, that is, using the fund’s ether to validate the network and earn additional ether, and that any fund wanting to do so in future would have to file a new rule proposal.
What a spot ether fund is
It is a vehicle that buys and holds ether, and whose shares are bought and sold on an exchange like a stock, from the investor’s usual account. Its value tracks the price of ether, less fees. Whoever buys it does not own any ether or handle any keys: they own a share in the fund. The advantage is convenience; the trade-off is that it depends on whoever holds the asset and on the fund’s costs.
Although the mechanism is similar to that of bitcoin funds, ether is not the same thing. Its network, Ethereum, works as a platform for applications and not just as a currency, and its price depends on different factors. The underlying question, whether ether should be treated as a security or a commodity, is still being debated: the SEC’s order focuses on the exchanges’ rules and does not settle it on its own, and the company Consensys had sued the SEC on 26 April precisely over how Ethereum is regulated.
Which risks are worth knowing
The first is volatility. Ether rose more than 20% in the days before the decision, to around $3,700, as expectations of approval grew. A move like that can reverse just as quickly, and the fact that the product is regulated does not remove the risk of losing capital.
There are also risks specific to the product: fees, which eat into returns compared with the asset itself; custody, concentrated in a few firms; possible gaps between the price of the shares and the value of the ether they hold; and regulation that keeps changing. And in Europe, the fact that a fund is listed in the United States does not mean it can be sold to private individuals: European rules require a key information document (KID) that many US funds do not have.
This note is general information and not investment advice. Anyone who holds or is considering holding crypto-assets should know what share of their wealth they represent, how they are held and how they are taxed in their case. Ask your adviser how it applies to your case.
The approval opens a regulated channel, but it does not make the asset any less volatile.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
