The U.S. Securities and Exchange Commission (SEC) has approved the sale of a spot Ethereum exchange-traded fund (ETF) in the United States, following a joint rule change application by Nasdaq, the New York Stock Exchange and the Chicago Board Options Exchange to allow trading of Ethereum investment products.

This is the second major decision made by the SEC regarding cryptocurrency exchange-traded products. In January 2024, the SEC approved a spot Bitcoin ETF after a long debate. This is an important approval, but trading will not start immediately. That is, the issuer needs the SEC to approve the individual ETF registration statement covering investor disclosures.

SEC Still Concerned About Ethereum ETF Price Manipulation

The SEC stressed the need for a comprehensive surveillance-sharing agreement with the Chicago Mercantile Exchange (CME) in order to detect and deter fraud and manipulative behavior.

Each exchange has a surveillance-sharing agreement with CME through their joint membership in the Market Surveillance Organization. Although CME does not currently monitor the spot Ethereum market, its futures contracts are highly correlated with the spot market. This means that price manipulation in the spot market could affect the futures market.

The exchange provided correlation analysis to demonstrate whether price movements in the CME Ethereum futures market are consistent with the spot Ethereum market. This data is critical to assessing whether CME’s monitoring capabilities in the futures market can effectively detect and prevent fraud in the spot market.

Protecting investors and ensuring market integrity for Ethereum ETFs

The SEC analyzed Section 11A(a)(1)(C)(iii) of the Securities Exchange Act to ensure that Ethereum-based exchange-traded product proposals protect investors and maintain market integrity. This approval sets several key requirements:

Pricing Information: Pricing and last trade information for each exchange-traded product must be provided through a securities information processor. Each exchange-traded product's website and primary market data vendor should provide the intraday indicative value (IIV) and NAV during trading hours updated every 15 seconds.

Portfolio Transparency: Exchange-traded products must disclose their portfolio holdings on a regular basis, including the amount of Ethereum and the amount of cash or cash equivalents held. This information is usually updated daily and is available on the exchange-traded product's website and major financial information platforms.

Monitoring procedures: Exchanges must have data exchange protocols to share information with other regulated markets and enhance their ability to detect and deter fraudulent activity. They also need to clearly define the conditions under which trading halts and suspensions can be imposed.

Addressing volatility and risk in Ethereum ETFs

The SEC also addressed volatility and risk concerns raised by commenters. For example, one commenter highlighted the price volatility of Ether and argued that spot Ether exchange-traded products could pose a threat to retail investors and the broader financial system, entangle the crypto industry with traditional finance.

The SEC considered these issues in the broader context and concluded that the proposals are consistent with the requirements of the Securities Exchange Act, including protection against fraudulent and manipulative practices.

While the SEC acknowledges the inherent volatility of the market, which they note could be a draw for many investors, a major focus for the SEC and other regulators is the impact that merging cryptocurrencies with traditional finance could have on the broader financial system.

The gradual introduction of a variety of derivative assets could have significant impacts on the financial system that have largely not been reviewed and addressed. Ignoring these potential consequences could lead to greater financial instability.