Coinbase Argues Bitcoin ETF Precedent Applies “Equally or More Strongly” to Ether

Coinbase has submitted a strongly-worded letter to the Securities and Exchange Commission (SEC) arguing for the approval of a spot Ether exchange-traded fund (ETF).

The letter was filed in response to a proposal by NYSE Arca to list and trade shares of the Grayscale Ethereum Trust as an Ethereum ETP.

TLDR

• Coinbase argues Ether is a commodity, not a security, based on CFTC’s treatment, court rulings, and SEC’s lack of objection
• Ethereum’s proof-of-stake governance mitigates risks of fraud and manipulation according to Coinbase
• Coinbase says SEC approval of Bitcoin ETFs should apply equally or more strongly to Ether ETFs
• Analysts warn that Ether ETFs allowing staking could introduce concentration risk to validators
• Coinbase highlights market depth, tight spreads, and price correlation as signs of Ethereum’s resilience

Central to Coinbase’s argument is that Ether should be classified as a commodity, not a security. The company points to the Commodity Futures Trading Commission’s (CFTC) regulation of Ether futures, federal court rulings stating Ether is not a security, and the SEC’s lack of objection to the CFTC’s commodity designation.

Coinbase states that the SEC’s approval of spot Bitcoin ETFs should apply equally, if not more strongly, to an Ethereum ETP. The company highlights Ether’s market depth, tight spreads, and price correlation as signs of a mature, efficient market resilient to manipulation. Coinbase also notes Ether’s trading volume is significantly greater than most S&P 500 stocks.

Today @coinbase responded to @SECGov‘s request for comment on the proposed @Grayscale Ether Trust ($ETHE) ETP. 27 pages and 96 citations that provide the (1) legal, (2) technical, and (3) economic rationale for approval. 1/6

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

Coinbase argues Ethereum’s transition to proof-of-stake has strengthened network governance. They state that ownership concentration, consensus mechanisms, liquidity, and governance mitigate risks of fraud and manipulation post-Merge.

The company also emphasizes the security mechanisms inherent in Ethereum’s blockchain which limit susceptibility to manipulation. Moreover, Coinbase has market surveillance capabilities through its agreement with the Chicago Mercantile Exchange (CME) to monitor any irregular trading activity.

On the other hand, analysts from S&P Global warn that ETFs allowing Ether staking could “introduce new concentration risk” regarding validators. If a single custodian handles staking for multiple Ether ETFs, it could exacerbate centralization on top validation protocols like Lido, which already has over 30% of staked Ether.

Coinbase makes a forceful case that the rationale for approving Bitcoin ETFs applies equally or more strongly for Ether funds. The company argues Ether is clearly a commodity and highlights signs of Ethereum’s market efficiency and resilience to manipulation risk.

However, analysts caution that ETF staking mechanisms need to be carefully evaluated to prevent over-centralization of validators. The SEC will have to weigh these varied considerations in making its determination.