Today’s the day that trading starts in Ether ETFs following the long awaited approval by the SEC yesterday. Eight of the nine ETFs have the cryptocurrency held in custody by Coinbase Custody. The only exception is Fidelity Digital Assets, which is looking after the cryptocurrency that underpins the Fidelity ETF. Hence, there are no bank custodians looking after the cryptocurrencies.
This is despite a reported recent relaxation of rules that previously blocked bank custodians. Either the rule relaxations came too late for these ETFs. Or the ETF issuers decided to stick with the same custodians they used for their Bitcoin ETFs.
In theory, the SEC’s accounting rule SAB 121 blocks banks from custody because it forces them to include the cryptocurrency on their balance sheet. Given cryptocurrencies are considered high risk, the banks would have to set aside a lot of capital, making custody too expensive.
SAB 121 is still in force despite the House and Senate voting to cancel it. President Biden vetoed their resolutions and an attempt to overturn his veto failed.
Congresswoman Waters revealed that the SEC was discussing SAB 121 modifications with custody banks. This came to light during House debates about overturning the veto. Later that day, Bloomberg reported that banks had been discussing the issue with the SEC since late 2023 and some had satisfied the SEC with their safeguards. Hence, the SEC had agreed they did not need to include the assets on their balance sheets.
If that’s the case, given custody banks have far higher security budgets than the likes of Coinbase, one would have thought that some of the ETFs might have given the bank custodians a try.
Ethereum without staking
Meanwhile, until recently the SEC had treated Ether 2 as if it was a security. It made an about turn in May when it classified it as a commodity, opening the path for yesterday’s approval.
Nine ETFs were approved by eight issuers: 21Shares, Bitwise, iShares (BlackRock), Fidelity, Franklin Templeton, Grayscale (2 ETFs), Invesco Galaxy and VanEck.
Several asset managers are offering reduced fees, with Van Eck, Bitwise and Franklin Templeton amongst those offering zero sponsor fees for limited periods.
“After the success of our spot bitcoin ETF (EZBC) launch in January, we are proud to add EZET to our growing lineup of digital asset ETFs,” said Patrick O’Connor, Head of Global ETFs for Franklin Templeton. “With EZET, we are thrilled to offer our clients additional access to the digital asset ecosystem within a regulated fund structure that integrates seamlessly into traditional portfolios.”
One notable difference is that in Europe the popular Ether physical ETPs involve staking. 21Shares Ethereum staking ETP has a market capitalization of $510 million and Coinshares’ equivalent ETP is $293 million. However, Ethereum doesn’t rank in the top five ETPs in Europe. 21Shares Solana staking ETP is number three at $987 million.
“One of the negatives we have seen in the applications is the dropping of staking,” said Chanchal Samadder, Head of Product at asset manager ETC Group. “We believe staking is a fundamental positive within our Ethereum ETP, ET32. Ethereum investments generate cash flows via staking rewards and, therefore, could be valued like a tech stock.”
