U.S. issuers and other firms expect the Securities and Exchange Commission to deny their applications to launch exchange-traded funds (ETFs) tied to the price of ether after discouraging meetings with the agency in recent weeks, four people said.
VanEck, ARK Investment Management and seven other issuers have filed with the SEC to list ETFs that would track the spot price of the world's second-largest cryptocurrency after bitcoin. The SEC must decide on VanEck's and ARK's filings, which are first in line, by May 23 and May 24 respectively.
Recent meetings between issuers and the SEC have been one-sided and agency staff have not discussed substantive details about the proposed products, said four people who participated.
That is in contrast to the intensive and detailed discussions between issuers and the agency in the weeks before its landmark approval of spot bitcoin ETFs in January, said the people who declined to be identified because the talks are private.
The agency, which is led by crypto skeptic Gary Gensler, rejected spot bitcoin ETFs for more than a decade over market manipulation worries but was forced to approve them after Grayscale Investments won a court challenge.
Issuers argued in the meetings that those ETFs and ether futures-based ETFs the SEC approved in October set a precedent for the spot ether products, and have tried to address potential regulatory concerns, the people said. SEC staff listened but did not spell out specific concerns or generally ask questions, suggesting the agency will deny the filings, they added.
That would be a setback for the crypto industry which had hoped spot bitcoin ETFs would pave the way for other similar products and push cryptocurrencies into the mainstream.
"It seems more likely that approval will be delayed until later in 2024, or longer," said Todd Rosenbluth, head of ETF analysis at data firm VettaFi, who is tracking the issue closely. "The regulatory picture still seems cloudy."
Some issuers said they still plan to file additional disclosure paperwork with the SEC to keep the conversation going.
A SEC spokesperson said it does not comment on individual filings. VanEck CEO Jan van Eck told CNBC this month the firm's application would "probably be rejected."
ARK did not return requests for comment. When asked by Reuters at an event this week about its ether application, ARK CEO Cathie Wood said only that ether could become a major asset class.
An expected thumbs-down is reflected in ether's price, said Hong Fang, president of crypto exchange OKX. While the cryptocurrency is up 39% this year, it has struggled to keep pace with bitcoin, which is up more than 51% and scaled new peaks last month.
"There's more downward pressure on prices as people build that expectation in," said Fang.
'MORE DATA'
The SEC has held just a handful of meetings on the ether products so far, according to the sources and SEC records.
The only meeting disclosed by the regulator was last month with crypto exchange Coinbase <COIN.O>. It related to Grayscale's application to convert its Ethereum Trust (ETHE.PK) into an ETF, for which Coinbase is the custodian.
The SEC approved spot bitcoin ETFs on the basis that existing market surveillance mechanisms for bitcoin futures ETFs, which it approved in 2021, were good enough for spot ETFs too.
Coinbase argued that the same rationale applies to the spot ether products, since ether futures and the spot market are highly correlated, according to the SEC disclosure.
If the SEC does reject ether ETFs, several applicants expect it to do so due to broad issues, such as the nature and depth of statistical data on the underlying ether market.
The agency may argue it has had limited time to observe ether futures, said Matt Hougan, chief investment officer at Bitwise Asset Management, which has filed for a spot ether ETF.
"I think that would be the mechanical reason why it would get pushed out is they just want to see more data."
Some say rejection could invite another lawsuit.
"It's entirely possible we'll eventually see ether ETFs," said one of the sources. "But not until somebody is denied and goes to the courts."
