Coinbase Argues For Spot Ether ETF As Analysts Warn Of ‘Concentration Risk’
United States crypto exchange Coinbase is firmly behind Grayscale in its application to convert Ethereum Trust into an Ether exchange-traded product (ETP).
On February 22, Coinbase Chief Legal Officer Paul Grewal shared the company's 27-page letter outlining the legal, technical and economic rationale for why the US Securities and Exchange Commission should approve an Ether-based ETP.
Coinbase presented five main arguments, including the US Commodity Futures Trading Commission's approval of ETH futures, statements by SEC officials, and court rulings that Ether (ETH) is properly considered a commodity and not a security.
The SEC also stated that it did not object to the CFTC's treatment of ETH as a commodity.
“Our letter shows what everyone knows who has paid little attention to the issue: ETH is not a security,” Grewal wrote on X. And the market sees ETH as a commodity, not a security.
He also continued that the Ethereum Stakeholder Agreement “has strong governance that demonstrates strong features in ownership concentration, communication, liquidity and governance, reducing the risks of fraud and manipulation.”
Today @coinbase responded to @SECGov's request for comment on the proposed @Grayscale Ether Trust ($ETHE) ETP. 27 pages and 96 citations providing (1) legal, (2) technical, and (3) economic rationale for approval. 1/6
— paulgrewal.eth (@iampaulgrewal) February 21, 2024
The letter's second contention is that the SEC's approval of spot bitcoin exchange-traded funds (ETFs) is equally, if not more, strong for the Ethereum ETP.
He argued that market data showed that ETH ownership and trading activity was highly fragmented, with high liquidity and tight spreads indicating an efficient and mature market.
Additionally, ETH futures are similar products to Ethereum-based currencies, so it would be arbitrary for the SEC to approve one but not the other, a tight tie according to Coinbase.
The firm argues that the technological and operational security mechanisms in the Ethereum blockchain “significantly limit ETH's vulnerability to fraud and falsification.”
In addition, the depth of the asset market, the tightness of distribution and the price correlation in the spot markets are highly indicative of a market that is impervious to fraud and manipulation.
Finally, Coinbase says it has sophisticated market monitoring and an agreement with the Chicago Mercantile Exchange to monitor trading on its platforms.
The letter was filed in response to a proposed rule change by NYSE Arca to list and trade Greyscale Ethereum Trust shares as an Ethereum ETP. The SEC routinely solicits comments from the public on proposed rule changes before making a decision.
Coinbase is now out here campaigning to approve the SpotEther ETF…
1) ETH = Commodity
2) SEC approved spot btc ETFs (also ETH futures ETFs approved)
3) ETH is not susceptible to fraud and technological manipulation.
4) Deep spot ETH markets
5) CME ETH Future Market SSA
They like to see. pic.twitter.com/DGbLpc8bW7
— Nate Geraci (@NateGeraci) February 22, 2024
Ether EFAs “May Exacerbate Concentration Risk”
Just two days earlier, analysts at ratings agency S&P Global shared concerns that Ethereum ETFs that include Stating “could pose a new risk of concentration” on the blockchain network.
Some places like ARK Invest and Franklin Templeton have proposed Ethereum ETF applicants to participate in the fund.
S&P 500 Managing Director Andrew O'Neill said: “The rise of Ether staking ETFs could impact the mix of validators participating in the Ethereum network's consensus mechanism.”
“The involvement of institutional custodians can reduce the focus on Lido's decentralized staking protocol. However, it could also introduce a new concentration risk, especially if it chooses to make a portion of the bulk of Ether included in these ETFs.
According to Dune Analytics, Lido currently has 31.5% of the total Ethereum share.
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