Next up is the Ethereum spot ETF?

Next up is the Ethereum spot ETF? Picture 1

The moment BlackRock filed its iShares Bitcoin Trust application with the U.S. Securities and Exchange Commission (SEC), it was clear that it would be approved. The evidence is on page 36 of the 111-page filing, which mentions a 'custodial sharing agreement' between NASDAQ and US BTC spot market platforms (like Coinbase). Add to that BlackRock's 575-1 ETF application approval filing, and the outcome seems predetermined.

But the SEC also clearly expressed its genuine concerns about cryptocurrency market manipulation. Bitcoin price manipulation has been cited in most, if not all, previous ETF rejections. The SEC is not convinced that Coinbase and other cryptocurrency exchanges can be trusted to 'prevent fraud and manipulation'.

After the spot Bitcoin ETF was approved, there was no record inflow of billions of dollars as reporters predicted. However, the 'leading enemy of crypto' and arguably the biggest opponent to blockchain adoption in the United States is finally coming to terms with crypto's place in the market.

There will soon be an Ethereum spot ETF approved similar to the legal precedents set by the Bitcoin spot ETF.

Since 2017, many have been saying that every financial asset will one day be on the blockchain. Larry Fink, CEO of BlackRock, finally agreed. ETFs, he said, are just a stepping stone to a 'technological revolution in financial markets' that includes 'tokenization of all financial assets'.

Fink's future vision is: 'Each bond will have its own CUSIP identification number, it will be on a common ledger. This helps eliminate any corruption by having a tokenized system'.

Historically, markets have often struggled with integrity issues. Transactions require trust that the other party will uphold their agreement. Financial institutions, both commercial and regulatory, have flourished as a way to solve this problem. However, it all requires participants to place their trust in centralized third parties whose operations are not transparent and, quite frankly, not immune to corruption.

Blockchain technology reduces dependence on third parties and the risks it brings. Fink is optimistic, saying that blockchain can eliminate all illegal behavior. Criminals will always find ways to commit crimes. But blockchain can provide more transparent transactions that can be tracked in real time, prevent fraud and allow regulators to monitor illegal behavior much more easily and effectively.

Many industry players like Fink and even many regulators are now starting to see the real, tangible benefits of blockchain. That's why it will be difficult for the SEC to justify not approving many other products once it has approved the Ethereum spot ETF. We will have NFT ETFs, DeFi ETFs, and even ETFs for top real-world tokenized assets.

Institutions with trillions of dollars in capital will eventually be able to access tokens through regulated means at locations with approved partners. They will leverage blockchain in use cases of greater institutional benefit, such as tokenized bonds issued in Europe or tokenized securities now legal across countries in APAC. Legacy finance in the United States will finally open up to the tokenization sector.

But tokenization won't just be on a public ledger as Fink hopes. While it would be great for BlackRock if everything happened on Ethereum – which would drive value for a future Ethereum spot ETF – it's just not what regulators or the market wants.

Regulators and organizations have repeatedly indicated a preference for publicly licensed networks or privately licensed networks.

In the EY Parthenon report, 60% of organizations said they prefer a publicly licensed network to tokenize assets. Likewise, these networks are also of concern to regulators according to a report by the Global Financial Markets Association and Boston Consulting Group.

A licensed network will be the network of choice for many people. They may be comparable to existing infrastructure in the capital markets (private licensing) or come with regulatory and organizational risk management frameworks and tools to enable predicated compliance. customer authentication/AML (public licensing).

SEC approval of a spot Bitcoin ETF has given the green light for institutional capital to pour into cryptocurrencies and tokenization. However, the nascent cryptocurrency industry is only in the first round of this revolution.

Samuel Daniel

Update 28 May 2024