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Will Ethereum Beat Bitcoin in the Race to an ETF?

Reading Time: 2 minutes by on May 4, 2017 Commentary, Ethereum, Finance, News
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Operators of the EtherIndex Ether Trust are confident that their Ethereum-based exchange-traded fund (ETF) will be approved by the US Securities Exchange Commission (SEC) before the Winklevoss twins’ bitcoin ETF COIN.

On April 21, the EtherIndex team filed a rule change with the SEC and NYSE Arca to its original Ether Trust ETF proposal. The rule change indicated on the official document accepted by the SEC provided the commission with a certain time frame to either reject or approve the ETF.

On March 10, the SEC officially rejected the Winklevoss twins’ bitcoin ETF COIN. In its official statement, the SEC claimed that the ETF was denied due to the lack of regulations in overseas bitcoin markets. The SEC stated:

“Several commenters note that the majority of bitcoin trading occurs on exchanges outside the United States. One commenter claims that most daily trading volume is conducted on poorly capitalized, unregulated exchanges located outside the United States and that these non-US exchanges and their practices significantly influence the price discovery process. Another commenter states that the biggest and most-influential bitcoin exchange is located outside U.S. jurisdiction.”

The Ethereum ETF could have a higher probability of being approved by the SEC due to its non-currency-like attributes and characteristics. In essence, Ethereum’s tokens, ETH, are designed to support the network’s decentralized applications as ‘gas.’ Users can pay gas to applications or when initiating smart contracts on the network. Hence, it is difficult to establish Ethereum’s ETH as a cryptocurrency.

As noted by the SEC:

“The Exchange represents that unlike bitcoin, ether was not designed to function purely as a store of value. Instead, ether was meant to pay for specific actions on the Ethereum Network. However, according to the Exchange, ether’s market is currently supported by many of the same online exchanges and the same infrastructure that has developed around the bitcoin network.”

For this reason, because the SEC perceives Ethereum’s ETH as an asset, rather than as a currency like bitcoin, it will most likely provide a leeway for the Ethereum Trust ETF.

More importantly, the main argument of the SEC behind its denial of the bitcoin ETF COIN was the lack of overseas regulation in bitcoin. EtherIndex Ethereum Trust’s ETF proposal was filed after major markets including China and South Korea have enforced tight Know Your Customer (KYC) and Anti-Money Laundering (AML) policies on local exchanges.

According to various cryptocurrency market data providers, Ethereum’s three largest exchange markets are the US, South Korea, and China, with 21.7 percent, 11.1 percent, and 6.5 percent market share respectively. Since the three markets which dominate the global Ethereum exchange market are well regulated, the SEC will not be able to disapprove the Ether Trust ETF under the criteria of “lack of overseas regulation.”

Furthermore, as outlined by ETF analyst David Dierking, Ethereum’s recent partnership strategy to form Enterprise Ethereum Alliance could potentially have a massive impact on the SEC’s decision. Currently, multi-billion dollar companies such as BHP Billiton, Microsoft, and JPMorgan are working with the EEA to develop Ethereum-based applications. If the SEC already understands ETH as a token which serves as the basis for commercial applications and projects initiated by the abovementioned industry leaders, Ethereum has already made a case for legitimacy and regulation.

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