$ETH: Former SEC Chair Jay Clayton Says Only Stage 1 of Approval of Spot Ethererum ETFs Has Been Passed

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As a researcher with extensive experience in the financial markets and digital assets, I find the recent SEC approval of 19B-4 filings for several US-based spot Ethereum ETFs to be a significant development. Having closely followed the regulatory landscape for digital assets, I’ve witnessed the lengthy approval processes for similar applications in the past. In fact, Bitcoin ETFs took at least 90 days to secure approval. However, based on Clayton’s statements and my own analysis of the situation, I believe that this process may be accelerated for Ethereum ETFs.

On May 24, Jay Clayton, the previous SEC chairman, made an appearance on CNBC’s “Squawk Box” program to talk about the SEC’s recent approval of 19B-4 filings for multiple Ethereum spot ETFs based in the United States, which was announced on May 23.

Exciting news! The Security and Exchange Commission (SEC) has given its approval for Ethereum-backed spot ETFs. This is a significant turnaround, making it an reality at last. Kudos to @PhoenixTrades\_ for sharing this development.

— James Seyffart (@JSeyff) May 23, 2024

As a crypto investor, I’m excited to share that we might see some accelerated progress in the approval process for Bitcoin ETFs. While it usually takes several months, even up to five in certain cases, Eric Balchunas and I believe this timeline may be shortened. Keep in mind, though, that the Securities and Exchange Commission (SEC) has previously required a minimum 90-day wait for Bitcoin ETF applications. We’ll have more information soon.

— James Seyffart (@JSeyff) May 23, 2024

Here are the key points from the discussion:

  1. Approval Process: Clayton clarified that there are two steps in the approval process for such products. The first step, which was achieved, is the listing approval. The second step, which is pending, is the approval of the product itself, involving the registration statement.
  2. Implications: The approval of the listing does not mean that trading can begin immediately. It signifies a step towards inevitability, similar to the process with Bitcoin ETFs.
  3. Differences from Bitcoin ETFs: Unlike the Bitcoin ETF approval, which was compelled by a judge’s decision, the Ethereum ETF approval faces different circumstances. A key issue has been the classification of transactions in Ethereum and whether they are considered securities.
  4. Legislative Influence: Clayton mentioned that recent congressional actions, including a new crypto bill — i.e. the Financial Innovation and Technology for the 21st Century Act (FIT21) — have clarified aspects of digital asset custody and trading. This legislation appears to influence the SEC’s stance and indicates a desire from Congress to see digital assets like Ethereum trade similarly to securities.
  5. Historical Context: Clayton discussed his previous hesitancy to approve such products due to concerns about market efficacy. He now sees the market for Ethereum as having developed sufficiently to warrant consideration for such a spot ETF.
  6. Commodity vs. Security: He used an analogy involving Broadway tickets to explain how something can transition from being a security to a commodity. Initially, investments in a project represent securities. Once the project (or network) is established, the same investments (or tokens) may be treated as commodities used within the network.

As a crypto investor, I can tell you that the SEC’s consideration of an ETF application is a two-part procedure. First, the SEC reviews the proposal to ensure it complies with the necessary regulations. If approved, the applicant then moves on to the second stage where the SEC assesses whether the ETF meets the requirements for listing and trading on a national exchange.

Stage 1: 19b-4 Filing Approval

The initial step includes the SEC’s approval of an exchange’s rule change proposal, referred to as a 19b-4 filing, for listing and managing a new Exchange-Traded Fund (ETF). This document details the proposed guidelines and trading procedures for the ETF. Upon the SEC’s review and approval of the 19b-4 filing, the exchange is authorized to list the ETF; however, it does not signify that the product has been launched yet.

Stage 2: Registration Statement Approval

In the second phase, the ETF issuer’s registration statement, which is a document outlining crucial details about the ETF such as its goals, methods, risks, and costs, undergoes SEC review. The Securities Act of 1933 and the Investment Company Act of 1940 mandate that this document adheres to specific regulations and offers sufficient disclosure for investors. Once the SEC grants approval, the ETF issuer is authorized to introduce the product on the designated exchange and initiate trading.

As a researcher, I’d like to emphasize that while the Securities and Exchange Commission (SEC) approves the 19b-4 filing for an exchange-traded fund (ETF), it doesn’t automatically mean the registration statement will be approved as well. Conversely, SEC approval of a registration statement does not ensure a green light for the 19b-4 filing. Both processes are distinct and require separate approvals before the ETF can commence trading in the financial markets.

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2024-05-24 17:03