SEC's lack of internal coordination suggests Ethereum ETF pivot 'entirely political,' source says

It's crunch time as firms grapple with the Securities and Exchange Commission's seemingly sudden shift in potentially approving spot ether exchange-traded funds. 

On Monday, the SEC's division of trading and markets called exchanges to tell them that they would be approving 19b-4s this week, according to a person familiar. This comes as Barrons reports that SEC staff told exchanges on Monday that it was leaning toward approving them, citing people familiar with the matter.

This is a 180-degree turn from what the SEC told issuers two weeks ago when the agency showed no interest in the filings, a person familiar told The Block. 

"It is a completely unprecedented situation, which means it's entirely political," the source said. 

Issuers, who are then responsible for S-1s, began making calls to the SEC. However, examiners within the SEC's division of corporation finance were seemingly not on the same page as the agency's division of trading and markets, the source familiar with the situation said. 

Notably, the SEC's division of trading and markets approves 19b-4s, while the agency's division of corporation finance is in charge of S-1s. 

"They're not even internally coordinated yet, which is why this is most likely a political decision," a person familiar said. 

Some sources speculate that the SEC's change of heart could be politically motivated as elections are approaching quickly. Former President Donald Trump has appeared to be pro-crypto over the past month. The former president told a crowd that bought his NFTs that President Joe Biden doesn't know what crypto is and said, “If you like crypto in any form, and it comes in a lot of different forms, if you are in favor of crypto, you better vote for Trump." 

The source said they would not be surprised if this becomes a campaign issue. 

"The issue is that the Democrats desperately need young people to go out and vote for them. And the main positioning, if you look at what Biden is doing from a campaign perspective, is to position himself as a forward-looking octogenarian," the source said. President Joe Biden could score a win via the SEC approving spot ether ETFs, the source added. 

The SEC did not immediately respond to a request for comment. 

Next up are updates to 19b-4 forms after receiving comments from the SEC. Given the tight deadlines, the source said, comments on 19b-4s will be very light. 

"They're [SEC] doing the equivalent of writing the term paper the night before," the source said on the agency's work on getting back comments on 19b-4s.  

Not so sudden

Some were not sure that the SEC was necessarily suddenly changing its mind on spot ether ETFs. 

"If the SEC wanted to draw a line in the sand on ether – whether because they believed it was security, they had concerns regarding the correlation between the spot and futures markets, or some other reason – their chance to do so was last October prior to approving ether futures ETFs," said Nathan Geraci, president of The ETF Store, said in an email to The Block. "They didn't do that." 

The SEC previously greenlit a batch of ether futures ETFs in October 2023, including from ProShares, VanEck and Bitwise. 

"Once the SEC approved ether futures ETFs, that likely sealed the fate of an approval outcome for spot ether ETFs," Geraci said. "I strongly suspect the SEC learned an important lesson from the circus atmosphere surrounding the spot bitcoin ETF approval process and decided to approach spot ether ETFs much more quietly." 

Geraci also noted that the SEC did most of the "heavy lifting" on the language it wants in spot ether ETFs' 19b-4s and S-1s when it approved spot bitcoin ETFs earlier this year. Some sticking points had to be ironed out then, including whether there would be a cash or in-kind redemption model. 

"That made it much easier for the SEC to wait until the last minute to engage with exchanges and issuers," Geraci said about spot ether ETFs.