If Bitcoin is the most representative asset of the crypto world, Ethereum has helped the principle of decentralization find its footing in the blockchain world and beyond. Ethereum-powered smart contracts have helped build applications that have eventually led on-chain transactions and communication to become intermediary-free in a trustless and secure fashion.
From encouraging a fairer financial system to tokenizing real-life assets and empowering us with an open internet – free from monopolizing entities controlling user data – Ethereum has been at the forefront of making the blockchain-powered world a more democratic, equitable, and innovative space. It is no wonder that Ethereum occupies close to one-fifth of the crypto world’s market capitalization.
However, despite being one of the most catalyzing assets, Ethereum has been finding itself in regulatory limbo for quite some time now.
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Gary Gensler’s Interview and the Uncertainty around ETH’s status
The current US President, Joseph R. Biden, nominated Gary Gensler as Chair of the United States Securities and Exchange Commission on February 3, 2021.
In an interview given on Monday, June 27, 2022, Gensler characterized Bitcoin as a commodity but “refused to lump Ethereum’s Ether, the No. 2 cryptocurrency, under the same label.” This reluctance to characterize Ethereum led to confusion regarding whether Ethereum was a commodity or security.
If it were a security, any sale and purchase with its use would count as capital gain, requiring it to be reported to the IRS, essentially making it unusable for small purchases.
More importantly, Ethereum’s security status would put it under the supervision of the Securities and Exchange Commission and all the restrictions that SEC regulations bring.
While this mist of uncertainty and confusion surrounding Ethereum could be far-reaching in its impact since many crypto and blockchain projects are dependent upon it, we shall discuss some of the most crucial concerns that have arisen of late.
ETF applications: Will SEC Approve?
With as many as 11 Bitcoin ETFs recently getting approval, speculations are rife about whether Ether ETFs experience the same outcome. When asked about this, the SEC Chair, Gary Gensler, did not disclose anything decisive. According to press reports that came out after Gensler’s Squawk Box interview with CNBC on February 14, “Gensler simply indicated that the process would be handled in precisely the same way as Bitcoin.”
A list of Ether ETF applications has been delayed and postponed by the SEC so far, including that of:
- Invesco
- Grayscale
- Fidelity
- BlackRock
- VanEck
- Hashdex
Franklin Templeton also filed for spot Ether ETF on February 12. The SEC will come out with its decision on these applications in the days to come. For instance, it would decide on:
- VanEck – May 23rd
- ARK 21 – May 24th
- Hashdex – May 30th
Following these, by June 18, it would decide on Grayscale’s application, leading up to decisions on Invesco’s by July 5. Concluding this sequence, by August 3rd and 7th, it would address Fidelity’s and Blackrock’s applications, respectively.
While many ETH ETFs are in the pipeline for approval, experts are of the opinion that introducing the feature of staking can add more value. While advocating for staking as a future add-on, market experts believe that the initial Ethereum ETFs will be of a ‘plain vanilla’ structure, where ETFs will track the spot price of Ethereum as a first iteration.
However, incorporating staking rewards into these instruments would mean rewarding any ETH holder for bonding their holdings to validators. These validators would subsequently propose and attest to new blocks on the Ethereum blockchain to receive freshly minted ETH and a portion of the block transaction fees. According to an estimate, a fund with a balance of 9,600 ETH could earn an extra 32 ETH on a monthly basis.
There are several advantages of introducing staking to ETH ETFs. It would enhance the fund’s revenue and ensure Ethereum’s network security, fostering the active participation of validators to make the network more robust and resilient.
Integral to Ethereum, the presence of staking rewards to ETH ETFs signifies full ownership of the asset, allowing fund managers to innovate with these staking rewards in compensating their investors. They can opt to provide dividends or increase the net asset value (NAV) of the fund, offering win-win propositions for all stakeholders involved. However, for now, it would be too early to make credible forecasts on the shape Ether ETFs are to take in the future.
Meanwhile, we may discuss the next agenda on our list, which we have termed the curious case of the Prometheum listing.
The Curious Case of Prometheum’s Listing ETH as a Security
Prometheum claims itself as an entity that has been building the Future of Markets. It claims to be providing solutions for ‘digital asset securities investing — bringing together a blockchain-powered platform with the benefits of a securities-regulated marketplace.’ It also positions itself as an SEC and FINRA-registered entity that is into building the necessary connection between trad-fi systems and crypto investing. In short, it wants to do crypto differently by offering a platform where one can buy and sell digital asset securities in a securities setting.
Within this service environment, Prometheum has hit the headlines by announcing, to begin with, custody of ETH as its first digital asset. The move has baffled several crypto industry experts for multiple reasons. Let us look at a few of them.
Prometheum enlisting ETH as a security could prove the claim of the pro-Ethereum lobby that it could be handled in the United States in a way that satisfies the regulatory authorities. Its ETH security service offering would also alter the way the United States authorities have asked businesses so far to come and do crypto business in the US.
Speculations are already doing the rounds that Prometheum’s entry may force the Security and Exchange Commission to declare Ethereum as a security. And if the SEC does so, it could mean Prometheum holds a monopoly over the ETH security trading market.
While Prometheum’s approach towards ETH may seem innovative and aspirational in a market that is fast-evolving and burgeoning, industry analysts are apprehensive. And they’ve their reasons for their anxiety.
Founded by Aaron and Benjamin Kaplan, Prometheum had its first regulatory approval in 2021. The Prometheum Ember ATS Inc. received approval to operate its ATS and provide accredited and non-accredited investors with the choice to buy, sell, and manage digital asset securities.
It hit the news when it went on to have a second and unusual regulatory approval from the Financial Industry Regulatory Authority, FINRA. The approval was to operate as a special-purpose broker-dealer for digital asset securities. Created as a category by the SEC in 2021, no one had managed to attain such approval before Prometheum.
However, this dual approval from the SEC and FINRA did not make things more credible for legal experts in the field. While Prometheum claimed that it had found a viable route for crypto trading, the legal experts argued that the platform did not have any assets available for trading.
Some also argued that SEC’s approval and Prometheum’s trading under its regulatory scheme compelled everyone to see ETH as a security, while it could be a commodity like gold or oil. It is essentially the dilemma that we have been discussing here. However, the Kaplan brothers appeared quite sure of their assessment of cryptocurrencies as securities.
They also put forth the argument that it is possible for their platform to list cryptocurrencies, like ETH, as securities under the exemption known as Rule 144. Rule 144 is put into use when one decides to facilitate trades in restricted stocks.
Not only legal and regulatory experts but also the entry and manipulation of Prometheum have caused a stir in the US political world, as several Republican lawmakers have already begun pointing fingers at Gary Gensler. According to their allegations, Prometheum is nothing but Gensler’s stooge that he has been using to drive his regulatory agenda.
The claim of the Republicans gained enough steam when Prometheum received an invitation to testify at a congressional hearing about crypto when it had very little experience in the space compared to many of its peers.
All these claims and counter-claims have added to the confusion and regulatory limbo that Ethereum had already found itself in more than a year ago and counting.
The third and final stream of confusion flowing around Ethereum is mostly because of its own evolutionary nature, and it has to do with the launch of Ethereum 2.0.
The Launch of a New Ethereum: What’s in Store for the New Projects?
Ethereum’s transition from a Proof of Work mechanism to a Proof of Stake mechanism was radical in many aspects. Ethereum 1.0, or Ethereum mainnet, which helped many innovative projects develop and flourish, operated on the Proof of Work consensus mechanism, allowing for the mining of ETH tokens.
From September 15, 2022 onwards, Ethereum shifted to Proof of Stake, which involved the verification of transactions by staking. Of course, the transition was meant to achieve better results in the areas of network efficiency, security, and scalability.
However, the differences between Ethereum 1.0 and Ethereum 2.0 covered more ground than mere performance improvement. It had its impact on the areas of a consensus protocol, blockchain conception, security, speed, energy, scalability, and gas fees.
Many experts believe that the advent of Ethereum 2.0 has been like scoring a self-goal against one’s own team. The transition from Ethereum 1.0 to Ethereum 2.0 made it possible for regular users to leverage the rewards that were earlier meant for miners. Now, everyday users can avail the same benefits by holding any ETH liquid-staking derivative.
Many big players in the industry, like Coinbase and Frax, were quick to hop on this bandwagon. They promptly released ETH liquid staking derivatives. These derivatives were as beneficial as a regular ETH and were also a yield-generating asset. Like other derivatives, these ones offered exposure to the price movement of the underlying asset, ETH in this case, while maintaining liquidity and keeping staking benefits available.
In the long run, these ETH liquid staking tokens proved to be more capital-efficient than regular ETH, thereby offering very little incentive for the average user to hold onto ETH, especially considering that the primary benefit of holding ETH was the potential for price appreciation. However, with the advent of this shift, individuals now had the opportunity to invest in a liquid staking derivative, which not only retained the value proposition of ETH but also enhanced user profits through staking yields.
The evolution of Ethereum prompted many projects to integrate liquid staking Ether into protocols. Many who could not keep up with the shift had to face the risk of going into oblivion.
Ethereum: Dabbling in Status, Unfazed in Value
With all this confusion and doubt surrounding its status, one thing remains steady, and that is the value that Ethereum brings to the table in the world of decentralization. It continues to be a technology that helps digital money and global payment applications flourish, helping create a sustainable, wholesome economy.
In this economy, creators can earn online, and the unbanked population can access finance, significantly altering the traditional dynamics of lending and borrowing, making them more people-centric by freeing them from the clutches of intermediaries.
Many real-world assets that were considered to be less liquid could be tokenized and moved across the board more freely. The tokenization of these assets made the system of selling and buying more transparent and traceable. Funds could easily reach where they belonged without requiring cost-bearing, complicated intermediaries to facilitate their movement and take a cut.
While Ethereum’s value as a tool geared towards development, growth, and prosperity in the Web3 world remains unmatched, its market and investment status need more clarity. While it is necessary to keep an eye on how the Prometheum story unfolds, we must also wait for the SEC’s decisions on Ethereum ETFs.
Starting from the end of May to August, one after another, these decisions will become public. Perhaps that will be the time for ETH to come out of the regulatory limbo and emerge as the game-changing asset that it had promised to be!
