Three Common Questions After the Approval of ETH ETF by the U.S. SEC

The U.S. Securities and Exchange Commission (SEC) recently approved a key rule change, allowing the listing of an Ethereum native token ETF. This unexpected move has raised questions among industry observers about the motivation behind this decision and its potential impact on Ethereum and other major cryptocurrencies.

CoinDesk's opinion piece attempts to address several common questions.

Question 1: Political Motives Behind Decision-Making?

Shift in Cryptocurrency Regulations?

The timing of the SEC's approval has sparked speculation about the political motives behind it. Just days before the announcement, the U.S. House of Representatives passed the significant cryptocurrency bill FIT 21. Furthermore, there have been recent bipartisan efforts in Congress to repeal the controversial SEC cryptocurrency custody accounting rules, indicating a potential shift in the regulatory environment.

The cryptocurrency market bill FIT21 successfully passed through the House of Representatives, with both support and opposition; what comes next?

"Custody should be treated as a liability" - U.S. House of Representatives passes SEC cryptocurrency accounting rule SAB 121, industry pushes back

Impact of Legislative Actions

In these legislative actions, the Democratic Party has been actively involved, suggesting a softening stance by the U.S. government towards cryptocurrencies. President Biden's decision not to veto the cryptocurrency market structure bill FIT21 represents a significant concession. This political backdrop may influence SEC Chairman Gary Gensler's stance on cryptocurrency regulations, possibly considering a stricter stance as a political burden.

Support from Former President Trump

Additionally, former President Trump's recent support for cryptocurrencies has further influenced the situation. Gensler may believe that continuing to reject an ETH ETF could be politically unfavorable, especially given Trump's support.

Trump states the U.S. must become a leader in the cryptocurrency space, promising clemency for Silk Road founder

Question 2: Impact on Ethereum?

Increased Institutional Interest

The approval of an ETH ETF is expected to significantly boost institutional interest in Ethereum. This move not only serves as validation but also provides a familiar investment vehicle for a wide range of investors, from individual 401k holders to large hedge funds.

However, some argue that there is still limited understanding of Ethereum in the market: older individuals do not understand "Ethereum," and ETH ETF lacks traditional market appeal

Potential Market Dynamics Shift

Michael Anderson, Co-founder of Framework Ventures, points out that many institutions may be eager to adjust their strategies and infrastructure to accommodate the new Ethereum ETF. The entry of these funds could bring more users into the Ethereum network, especially as fund managers may not be allowed to stake the ETH they hold, prompting new investors to stake ETH themselves to earn rewards.

Clarification of Regulatory Status

This approval also brings clarity to Ethereum's regulatory status.

Jake Chervinsky, General Counsel at Variant, emphasizes that if these funds are allowed to trade, it may mean that un-staked ETH is not considered a security by the SEC, potentially encouraging more institutions to enter the market, as past regulatory uncertainty had kept them hesitant.

Positive Impact on the Ethereum Ecosystem

The launch of an ETH ETF could have a profound impact on the Ethereum ecosystem. The potential buying pressure from these funds could benefit Ethereum and Layer 2 solutions. Ethereum's token burning mechanism, which burns tokens with each transaction, could see new deflationary trends if trading volumes increase due to market dynamics driven by the ETF showing inflation before the deadline.

Staking Economy

The impact on the staking economy is another key area to watch. As platforms like Lido make it easier for individuals to stake ETH, the removal of more ETH from circulation by ETFs could exacerbate concerns about the centralization of staked ETH.

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Strengthening Ethereum's Position

SEC's approval of an ETH ETF is akin to an endorsement of Ethereum, potentially solidifying its leadership position. Michael Anderson suggests that even a small portion of institutional funding flowing into Ethereum, as seen with Bitcoin ETFs, could reinforce Ethereum's dominance in market share and valuation.

Question 3: Opportunities for Other Blockchains?

Prospects for Other Chains

This development could also create opportunities for other blockchains like Cardano, Solana, and Ripple. However, these blockchains face additional regulatory hurdles. While the SEC's stance on Ethereum remains unclear, clearly classifying assets like SOL for Solana and ADA for Cardano as securities complicates their path to ETF approval.

Financial Institutions Need Support

Financial institutions like CME play a crucial role in the adoption of Bitcoin and Ethereum futures. For other cryptocurrencies to achieve similar adoption, they will also need support from financial institutions, a prospect that is currently uncertain.