The Evolving Landscape of Ethereum ETFs

Updated: 01 October 2023

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In a recent development, Invesco, a major player in asset management, has collaborated with Galaxy Digital, led by Mike Novogratz, to propose an Ethereum (ETH) spot exchange-traded fund (ETF). This came on the heels of their combined efforts in June to introduce a Bitcoin (BTC) equivalent.

The designed Invesco Galaxy Ethereum ETF, as detailed in the firm’s S-1 registration statement, aims to mirror the actual spot price of ether. This will be achieved by holding onto ether units under the care of an unidentified custodian. While Invesco will be the main sponsor, Galaxy Digital will act as the “execution agent”, responsible for selling ETH to cover the Trust’s costs.

Invesco Galaxy just filed for a spot Ether ETF, I think this is the 3rd of 4th one of these, have to check tho.. pic.twitter.com/SIJVu8VzFk

— Eric Balchunas (@EricBalchunas) September 29, 2023

Recent times have seen the SEC receiving a flurry of Ethereum spot ETF applications. Preceding this particular proposal were those from Ark Invest/21Shares, Hashdex, and VanEck earlier in the month.

Crypto enthusiasts believe that given the almost confirmed introduction of an Ethereum futures product in the coming week, a spot ETF is the next rational step for U.S. cryptocurrency investments. On this note, Valkyrie and VanEck secured approvals recently. Further expanding the list, according to James Seyffart, a Bloomberg ETF analyst, are potential additions like Bitwise, ProShares, Hashdex, and Volatility Shares by October 2.

However, Valkyrie faced a hiccup as their Ethereum ETF, initially slated to commence trading on a Friday, was challenged by the SEC for buying Ether futures contracts prematurely. They have now agreed to reverse their current ETH futures position and will proceed with repurchases once the fund starts next week.

The plot thickens, Valkyrie just put out 497 that they are in fact not going to buy Ether futures until they are live (prob Tue) and are going to sell the Eth futures they bought (in an effort to jump line a bit). SEC must have threatened them to cut it out. Damn. https://t.co/yDkggCw3d1 pic.twitter.com/cKaV7k7AJs

— Eric Balchunas (@EricBalchunas) September 29, 2023

Ongoing Regulatory Hurdles

It’s worth noting that while futures ETFs are gaining traction with regulators, U.S. investors still find spot crypto ETFs elusive. The joint Invesco-Galaxy Bitcoin spot ETF initiative, along with those from rivals such as BlackRock, Valkyrie, and Bitwise, experienced two postponements by the SEC since June.

The SEC is now under significant scrutiny. Following a legal defeat against Grayscale, where the court found the agency’s continuous refusal of the spot ETF offering as “inconsistent and unwarranted”, especially when juxtaposed with its openness towards futures ETFs. Despite this setback, Bitwise recently revised its Bitcoin ETF proposal to factor in potential SEC objections against comparable offerings.

Ark 21 Shares and Global X have also faced delays in their application decisions. While Ark 21 Shares anticipates a final verdict by January 2024, Global X looks forward to November 23 of the current year, with possible extensions. Specific deadlines for Invesco, BlackRock, Valkyrie, and Bitwise remain ambiguous, potentially falling around mid-January, although the SEC retains the discretion to extend the date to mid-March.

Possible reasons for these postponements include the expected government shutdown starting October 1. The SEC’s Chairman, Gary Gensler, has expressed concerns about this shutdown affecting the agency’s operational capacity due to a predicted 90% workforce reduction.

Futures contracts traded on the Chicago Mercantile Exchange

Futures ETFs typically invest in contracts traded on the Chicago Mercantile Exchange (CME), as opposed to the actual smart contract assets. The CME’s oversight of futures ETFs is viewed positively by regulatory bodies, as it offers an extra layer of protection against price tampering. There’s buzzing interest among asset managers given that the SEC is rumored to greenlight Ether futures ETFs by early October.

At this juncture, Ether is experiencing a bullish phase, priced roughly at $1,600, a sentiment fueled by the impending launch of futures ETFs.