Ferrum CTO warns against concluding ETH non-security status

Since the launch of bitcoin ETFs in January, the crypto industry has been eagerly awaiting the go-ahead from the US Securities and Exchange Commission regarding ethereum. Finally, in May, when all hopes were fading, the commission decided to approve Forms 19b-4 for Ether Spot ETFs.

According to Taha Abbasi, CTO of Ferrum Labs, the decision is fundamental and is expected to be another step towards mass adoption.

“This demonstrates to the world that L1 and related assets are indeed working as intended and are now also recognized by government authorities,” Abbasi told crypto.news.

The sudden but highly anticipated move has raised many questions about how regulators view the second-largest cryptocurrency. Is it no longer a value? Is it a commodity?

Ether ETFs have been classified under the Securities Act of 1933 rather than the more restrictive Investment Company Act of 1940.

The Investment Company Act of 1940 applies to entities that are primarily engaged in the business of investing, reinvesting, and trading securities. It imposes stricter regulations on the operations, management and structure of investment companies.

If classified under this law, it would mean that eth is considered a security, which would subject it to more rigorous regulatory oversight and potentially impose additional operating restrictions on ETFs.

In contrast, the Securities Act of 1933 focuses on ensuring that securities offered to the public are registered and that investors receive sufficient information about the securities being offered. For eth, this means that ETFs must disclose detailed information about their holdings and operations.

According to Abbasi, this decision does not provide a definitive answer. Rather, it implies a more balanced regulatory environment that recognizes the unique nature of digital assets.

Abbasi cautioned against jumping to conclusions and emphasized that the recent approval refers to the ETP product and its “compliance with regulatory requirements for securities offerings” rather than providing a clear classification of eth itself.

“The impact of the ongoing debate over eth being a security will likely depend on future regulatory actions and interpretations, but this move indicates a cautious but progressive step towards the integration of digital assets into traditional financial markets,” he added.

Additionally, he urged market participants to interpret the SEC's cautious approach as an indication of the current regulatory uncertainty.

He believes that SEC Chairman Gary Gensler's continued refusal to clarify eth classification is “a strategic approach by the SEC to maintain flexibility and control” over the cryptocurrency sector.

“Participants should remain vigilant, comply with existing regulations and stay updated on any regulatory developments,” Abbasi advised.

Another key point of the recent approval was the impossibility of staking eth within these ETFs. The SEC considers betting to be an illegal offering by cryptocurrency platforms. The securities watchdog has also taken action against big names like Coinbase and Kraken for their betting services.

Several ETF issuers have modified their filings in response to this.

Abassi believes that the lack of staking could directly affect the attractiveness of Ether ETFs. He acknowledged the “unique benefits” the bet offers, adding that removing it from the equation would create “potential opportunity costs and competitive disadvantages.”

“The impact on returns and market dynamics will depend on how well issuers address these challenges and position their products in the market.”

However, he noted that by targeting specific investor segments and effectively communicating the strengths of their products, ETP issuers could still “attract a substantial investor base.”

As of now, the commission must still approve S-1 filings for ETF filings.

This process is known for its complexity and the meticulous scrutiny it requires in terms of investor protection, market maturity and regulatory clarity.

Bloomberg's Eric Balchunas expects a June launch for the ETF product. Abbasi, however, speculated that a “realistic” estimate could be “6 to 18 months” before we see Ether ETFs trading on exchanges.

“Market participants should stay informed about regulatory developments and participate in the public comment process to positively influence the outcome,” he concluded.