Coinbase Makes Case for Approval of Ether ETFs in Formal Letter to SEC

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Coinbase has thrown its support behind Grayscale’s application to convert its Ethereum (ETH) Trust into a spot Ether exchange-traded product (ETP).

In a 27-page letter shared on February 22, Coinbase’s chief legal officer, Paul Grewal, outlined the legal, technical, and economic rationale for the Securities and Exchange Commission (SEC) to approve an Ether-based ETP.

One of Coinbase’s key arguments was that Ether should be classified as a commodity rather than a security.

The exchange pointed to the Commodity Futures Trading Commission’s approval of Ether futures, statements by SEC officials, and court rulings as evidence supporting this classification.

SEC Not Objecting to Treating Ether as Commodity

Coinbase emphasized that the SEC has not objected to the treatment of Ether as a commodity by the CFTC, reinforcing its stance.

“Our letter lays out what anyone knows who’s paid even the slightest bit of attention to the subject: ETH is not a security,” Grewal said.

He added that both the SEC and the market have treated Ether as a commodity, both before and after the Ethereum network’s upgrade.

Our letter lays out what anyone knows who's paid even the slightest bit of attention to the subject: ETH is not a security. In fact, before and after the Merge, the SEC, the CFTC, and the market have treated ETH not as a security but a commodity. 2/6

— paulgrewal.eth (@iampaulgrewal) February 21, 2024

Coinbase also presented additional arguments in its letter.

It highlighted Ethereum’s proof-of-stake consensus mechanism, which demonstrates strong governance and mitigates risks of fraud and manipulation.

The exchange emphasized that the SEC’s approval of spot Bitcoin ETPs should equally apply, if not more strongly, to an Ethereum ETP.

Market data shows that ETH ownership and trading activity are dispersed, indicating a mature and efficient market.

The exchange also mentioned the technological and operational security mechanisms inherent in Ethereum’s blockchain, which significantly limit susceptibility to fraud and manipulation.

Coinbase cited its own sophisticated market surveillance measures, including a partnership with the Chicago Mercantile Exchange (CME), to monitor trading activities on its platforms.

The letter was submitted in response to a proposed rule change by NYSE Arca, which aims to list and trade shares of the Grayscale Ethereum Trust (ETHE) as an Ethereum ETP.

The SEC has requested public comments on the proposed rule change before making a decision.

Spot ETH ETFs Could Bring Centralization Risks

Meanwhile, there has been concerns regarding the concentration risk associated with spot Ethereum ETFs that include staking.

Analysts from S&P Global recently warned that the introduction of staking in ETFs could impact the mix of validators participating in the Ethereum network’s consensus mechanism.

While institutional custodians’ involvement could reduce concentration on the Lido decentralized staking protocol, it could introduce new concentration risks if a single entity is chosen to stake a significant portion of the included Ether.

“An increase in ether staking ETFs could affect the mix of validators participating in the Ethereum network’s consensus mechanism,” said Managing Director Andrew O’Neill.

“The participation of institutional custodians could reduce the current concentration on the Lido decentralized staking protocol. However, it may also introduce new concentration risk, particularly if a single entity is chosen to stake the bulk of ether included in these ETFs.”

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