Are More Crypto ETFs On The Way?

There's a lot of buzz about the possibility of Ethereum and its tokenized projects being the next ETF approved by the SEC. While this sounds promising, the intricacies and potential timelines for such an approval are less straightforward and may require a substantial shift.

Communities advocating for other projects like NANO, SEI, or LUNC to become ETFs are making their cases, but the reality is that it might be a considerable amount of time before we see another ETF offering for a different cryptocurrency.

The impact of having more ETFs in the crypto space is challenging to gauge. Imagine if Ethereum, Polygon, or Optimism were the next ETF offerings. While it could boost consumer confidence and translate positively to the markets, we must also confront the reality of the situation.

The current hype surrounding the anticipation of such an event may lead our imaginations into uncharted territories in terms of market value. Everyone wishes for this to become a reality, but the question remains – will it?

My estimate is that we have years to go before the next ETF, but we could possibly see this happen much sooner if certain principles and guidelines were followed and certain changes were implemented. What those changes would mean would be better saved for another writeup, but to quote myself from a previous article…

"The idea may be logical, but can the industry actually adapt or apply such regulatory frameworks without screaming that we're losing our identity and decentralized strengths? Probably not, but how else can the blockchain industry coexist with the public without policing ourselves? Scam after scam, rug after rug, does not convey to the public that we are a safe venture." Article

So what would it take for another cryptocurrency to become an ETF?

To become an Exchange-Traded Fund (ETF), a commodity, including cryptocurrencies like Ethereum and Bitcoin, must go through a regulatory process overseen by the U.S. Securities and Exchange Commission (SEC).

Here are the general steps and considerations that I think would apply:

• Commodity Status:

The SEC typically designates cryptocurrencies as commodities rather than securities. Ethereum, like Bitcoin, is considered a commodity. While there have been earlier discussions on Bitcoin being a security, ultimately it was cast as a commodity.

• SEC Registration:

The issuer of the ETF must register with the SEC. This involves providing detailed information about the ETF, its structure, investment strategy, risks, and financial health. This would basically end the wild west of mint happy scammers, but also slow inclusivity.

• Creation of the ETF:

The ETF must be created in a way that aligns with SEC regulations. For traditional ETFs, this involves working with authorized participants (APs) who facilitate the creation and redemption process, ensuring that the ETF’s market price aligns closely with its net asset value (NAV).

• Market Surveillance:

The SEC requires proper surveillance mechanisms to prevent fraud and manipulation. This is crucial in the context of cryptocurrencies, given our relatively young and volatile markets.

• Security & Custody:

Adequate custody solutions are essential. The SEC emphasizes the need for secure storage of assets, especially when dealing with cryptocurrencies. This is to prevent theft, loss, or misuse. While this seems easy, actual policy adoption would be slow to amass amongst most decentralized chains. Security is often lost at the project level, meaning wallet security or other issues, like hackers, and other issues.

• Arbitrage Mechanisms:

Traditional ETFs often use an arbitrage mechanism to keep the market price of the ETF close to its NAV. This might involve the creation and redemption of ETF shares in response to price discrepancies.

• Market Liquidity:

The SEC assesses whether the underlying asset (in this case, Ethereum) has sufficient liquidity in the market. This is to ensure that the ETF can be traded efficiently without significant price deviations.

The process for a cryptocurrency to become an ETF involves several critical steps, including designation as a commodity, SEC registration, creation alignment with SEC regulations, market surveillance, secure custody, arbitrage mechanisms, market liquidity assessments, and ongoing compliance adherence. While these steps may seem challenging, they could be navigated with self-regulatory frameworks that could attract SEC ETF consideration.

The blockchain industry could benefit from newly evolved and revised guidelines tailored to its complexities rather than relying on frameworks designed for traditional financial investments. Yet, there has been plenty of negative sentiments stating simply that this happening any time soon, would be impossible if not inconceivable until some regulatory frameworks are developed outside of the industry and from within.

Since a vast majority of tokens minted within various chains could only achieve this if the chain they are riding with does the same, it would take time, and real effort to meet such stringent regulations. Unfortunately, I don't see many chains working towards these goals in any real fashion. If they did, then perhaps the next ETF wouldn't come from some rouge project deciding to break free from the pack, and devise their own regulatory frameworks and chain. Which is highly unlikely, because nobody really knows what to do, it seems, besides wait for the SEC to tell them what to do, and that's a real pity!

Thanks for reading!

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