Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
After months of collapses, hacks, and frauds, the crypto industry has had a relatively boring start to the summer, with the news cycle dominated by legislative markups and everyone’s favorite financial instruments, ETFs. While they may not be as rousing as innovations like liquidity pools and perps, ETFs represent crypto’s best chance to go mainstream, at least in the world of traditional finance, through their ability to provide investors a familiar route to portfolio exposure.
Thanks to Grayscale’s legal battle with the SEC, which is set to be decided any week now, spot Bitcoin ETFs have received the lion’s share of attention in recent weeks, especially as major firms like BlackRock and Cathie Wood’s ARK seem poised for approval. A new entrant, however, is picking up steam: Ether futures ETFs, which have seen a spate of applicants since late July.
As a refresher, the SEC has only approved Bitcoin futures ETFs so far, which tracks the cryptocurrency’s price through futures contracts on CFTC-regulated exchanges. When companies, including Grayscale, filed for a similar futures ETF for Ether last May, they were asked by the SEC to withdraw their applications, which they did.
The past week has seen a half-dozen companies re-file, kicked off by Volatility Shares and followed by other firms including Grayscale, BitWise, ProShares, and VanEck. So what’s behind the influx?
Last week, Blockworks reported that the SEC indicated its “readiness” to consider Ether futures ETFs. I confirmed this with two of the companies, who spoke on the condition of anonymity. One said it got a call from SEC staff saying the agency was ready to “publicly review” the application, spurring them to re-file. The company said it wouldn’t have done so without the call.
The general counsel for another project told me that SEC staff had previously told them in May that Ether was a little too young for a futures ETF, and that Bitcoin futures had more of a track record before its ETF product was approved. After seeing other companies re-file last week, however, the company decided to follow suit. Only then did it get word from the SEC that the agency was ready to review the application in “ordinary course,” with the caveat that there was no guarantee the ETF would be approved. The general counsel described the SEC’s messaging as “schizophrenic,” but was still hopeful it represented a “sea change” for the agency.
That still doesn’t quite explain why the SEC seemingly changed its mind. It all started with Volatility Shares, a smaller outfit that was the first to re-file for an Ether futures ETF in late July after its surprising launch of a leveraged Bitcoin futures ETF in June.
According to a person familiar, the SEC asked Volatility Shares to withdraw its application for the leveraged Bitcoin futures ETF, which it decided not to do. Because of an SEC rule adopted in 2019, the leveraged Bitcoin futures ETF fit within an established framework, meaning it did not need an explicit stamp of approval, as is necessary for spot products. The SEC did not approve the product, in other words—it just didn’t deny it.
After its success, Volatility Shares proceeded with an Ether futures ETF to take advantage of the same rule. According to the person familiar, the SEC once again asked Volatility Shares to withdraw the filing, which it did not, ostensibly spurring the agency to inform other projects that it was ready to consider their applications. Volatility Shares and an SEC spokesperson both declined to comment.
Whether the Ether futures ETFs can proceed under the framework is anyone’s guess, although the projects I spoke with are predictably optimistic. Amid speculation that SEC Chair Gary Gensler is signaling that the floodgates will open, it seems premature to celebrate. All eyes remain on the D.C. Circuit Court of Appeals and its fateful Grayscale decision.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
