ETF firms race to be first in line for ether futures

The race is on in the exchange-traded fund business to offer the first ether futures product.

Since last Friday, five providers have filed prospectuses with the Securities and Exchange Commission for a total of six products. Most of those filings came Monday and Tuesday, after Volatility Shares kicked off the frenzy by asking the regulator Friday for permission to launch its proposed product.

The recent filings are for the Grayscale Ethereum Futures, Bitwise Ethereum Strategy, VanEck Ethereum Strategy, ProShares Ether Strategy and ProShares Short Ether Strategy ETFs.

Companies began attempts to bring those products to the market in May, although they quickly pulled requests for approval when the SEC indicated it would reject them.

But how much investors want cryptocurrency futures ETFs is a question. So far, the handful of bitcoin futures ETFs on the market have not seen assets flood in.

Fund companies anticipate much more interest in spot bitcoin ETFs. The SEC has rejected at least 30 applications for those products since 2017, but things started to look promising for ETF providers in June. The regulator reportedly denied BlackRock’s application after just two weeks, which some have interpreted as a sign that it could soon start approving products. The regulator may have resolved more of its concerns with the broad category but has issues within individual ETFs.

“The industry has been lobbying the SEC for years, unsuccessfully,” said Thomas Gorman, partner at Dorsey & Whitney. “The difficulty for the SEC is not only analysis of whether something is a security … but historically, for the trading stuff, the real concern and the one that [Chair Gary] Gensler has successfully used for stopping the trading … is volatility.”

While volatility across some of the major cryptocurrencies is not at the extreme levels seen a few years ago, concerns about valuations may still be valid, Gorman said. However, the SEC is very likely reviewing whether the industry has matured enough and if it can deal with volatility, he said.

Notably, the SEC is also fighting a lawsuit brought by Grayscale, which sued the regulator last year, after its request to turn its bitcoin trust into an ETF was rejected.

The SEC “gets a lot of deference” on regulating securities, but the outcome of that case could affect how it handles crypto ETF applications, both for spot and futures products, Gorman said.

Currently there are no ether futures ETFs on the market — but as product providers know, it pays to be first. For example, the first bitcoin futures ETF, the ProShares Bitcoin Strategy ETF, is the biggest, with just over $1 billion in assets, said Bryan Armour, director of passive strategies research for North America at Morningstar Research Services. Most of the other products are considerably smaller.

The ether futures ETF filings are “similar to the spot bitcoin ETF filings, where there is a flurry of filing hoping to be the first, or within the initial tranche of ETFs that are approved by the SEC,” Armour said.

However, ether-related ETFs could face more scrutiny by the regulator, which might have more issues resolving whether that cryptocurrency is a commodity or a security than it has had with bitcoin, he noted.

But given that bitcoin futures ETFs are already on the market, it might also be hard to apply the commodity-versus-security argument.

“It seems like they’re splitting hairs between the two,” Armour said. “They’re both futures.”

Two of the firms that initially filed for ether futures ETFs in May — Direxion and Valkyrie — have so far not refiled prospectuses for approval, he noted.

Last year, ether’s blockchain changed its consensus mechanism to “proof of stake” from “proof of work,” the latter of which is used by bitcoin. Proof of stake uses up to 99% less energy than proof of work, potentially making it more appealing to environmentally conscious investors.

A survey earlier this year of 250 U.S. advisors found that 70% expect more cryptocurrency-related failures this year, with more than a quarter anticipating something akin to the collapse of FTX.

Although it is unlikely that assets would flood into any of the ether futures ETFs, if approved, investors should be cautious about their exposure to crypto funds, Armour said.

“It should definitely be a small proportion of portfolios. It’s a pretty speculative and volatile asset,” he said. Although crypto has been praised as a hedge against inflation, “2022 proved that that would not always be the case,” he said.

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