Coinbase: Ethereum Spot ETF Approval Hinges on Staking, SEC Will Not Approve All at Once

Last night, Bloomberg analysts increased the probability of the approval of an Ethereum spot ETF on 5/23 to 75%. Coinbase, the custodian of Bitcoin and Ethereum spot ETFs, believes that approval is just a matter of time. It is unlikely that an Ethereum spot ETF supporting staking will be approved in the short term. The SEC is also not expected to approve all at once this time.

Is an Ethereum spot ETF on the horizon? Could it be approved by 5/23? ETH surges 18% to $3,640

Spot ETFs are Changing the Crypto Industry Model

Spot ETFs provide regulatory transparency and new channels for capital inflow, fundamentally altering the industry and challenging the existing cycle in the crypto market─where capital moves from Bitcoin to Ethereum, then to higher beta altcoins.

Following the approval of a Bitcoin spot ETF in the United States, the structural impact of ETF-based capital inflows has led to a market where new capital bases can only buy Bitcoin. This new market, comprising registered investment advisors (RIAs), wealth management firms, and brokerage companies, may view BTC in portfolios quite differently compared to many within the crypto circle or retail traders. While Bitcoin is the least volatile asset in a pure crypto portfolio, it is often seen as a small diversification asset within more traditional fixed income and stock portfolios.

Ethereum Spot ETF Approval Inevitable

Coinbase believes that the approval of an Ethereum spot ETF is only a matter of time. In fact, the primary reasons for approving a Bitcoin spot ETF also apply to an Ethereum spot ETF. That is, the correlation between CME futures products and the spot market is high enough to reasonably expect CME to monitor improper behavior in the spot market.

Reports indicate that the correlation study for the Bitcoin spot approval notification began in March 2021, a month after the introduction of CME ETH futures. The choice of this evaluation period is meaningful so that similar reasoning can be applied to the ETH market. In fact, correlation analyses previously proposed by Coinbase and Grayscale suggest that the spot and futures market correlation in the ETH market is similar to that of BTC.

Key Approval Lies in Ethereum's PoS Mechanism

Coinbase believes that the key to approval lies in Ethereum's proof-of-stake (PoS) mechanism.

Given the lack of clear regulatory guidance on asset staking, Coinbase thinks that an Ethereum spot ETF supporting staking is unlikely to be approved in the near term.

Recently, updates were made to the Ethereum spot ETF filings by Ark and 21 Shares, removing the Ethereum staking process, which Bloomberg ETF analyst Eric Balchunas pointed out as an attempt to reduce a reason for the SEC to reject them.

Ark 21Shares Removes Staking Process, Ethereum Spot ETF Makes a Last-Ditch Effort Before Deadline

Approval Probability Close to 40%

The Coinbase report indicates that Polymarket prices the likelihood of approval by May 31, 2024, at 16%, while Grayscale's Ethereum Trust ETHE trades at a 24% discount to net asset value (NAV). Based on this, they infer that the probability of approval is close to 30-40%. As cryptocurrencies become a political issue, it is still unclear whether the SEC is willing to provide the political capital needed to deny approval.

Even if the first deadline on May 23, 2024, is rejected, Coinbase believes that litigation is likely to overturn that decision.

Furthermore, it also suggests that not all Ethereum spot ETF applications will be approved simultaneously.