Author: Simar Linwei, Editor-in-Chief of DeThings

On May 8th, the world's largest Bitcoin asset management firm, Grayscale, withdrew its 19 b-4 application for an Ethereum futures ETF, leaving the securities regulatory agency with only three weeks to make a decision. Grayscale initially submitted the 19 b-4 application for the Ethereum futures ETF on September 19, 2023, and if approved, the ETF will be listed on the New York Stock Exchange.

According to DL News, Grayscale's CEO Michael Sonnenshein responded at an event hosted by the Financial Times in London on Wednesday, stating that the company will focus on converting its Ethereum Trust Fund into a spot ETF product. Sonnenshein stated, "The asset management company is withdrawing the application because many futures products are already available to investors, and sometimes we apply for products, which does not necessarily mean they will enter the market."

The attitude of the SEC, which has the authority to review Ethereum ETFs, remains ambiguous. US SEC Chairman Gary Gensler, in an interview with CNBC on May 7th, still holds a negative attitude towards cryptocurrencies. In his view, the SEC regulates assets exceeding $10 trillion, with cryptocurrencies accounting for only a small portion, but the part related to investor fraud in this field is very serious. When asked by reporters about the Ethereum ETF, Gensler stated that the committee needs to evaluate it. As of now, the committee must make a decision on VanEck's application by May 23, while the final deadlines for ARK 21 Shares and Hashdex are May 24 and May 30, respectively.

Since cryptocurrencies emerged from the shadow of the 2022 FTX collapse, led by Bitcoin, the cryptocurrency market has once again entered a new bull market. The price of Bitcoin officially broke its all-time high on March 5th, surging to nearly $73,000. However, as the second largest cryptocurrency, Ethereum's rise is not as impressive as Bitcoin's.

As of the time of writing, Ethereum's price remains around $3,000, with a nearly 100% increase from the bear market low, but still far from its all-time high of $4,800. In this context, whether the Ethereum spot ETF can be approved has become an absolute boon for cryptocurrency investors.

However, with Grayscale withdrawing the futures ETF and the US SEC delaying its stance, JPMorgan has also stated that the likelihood of an Ethereum ETF being approved in May is still less than 50%. So, what factors are hindering the approval of the Ethereum spot ETF? Can Ethereum still attract "Wall Street institution bulls" like Bitcoin?

The author believes that three key factors will determine the fate of the Ethereum spot ETF. They are the PoS consensus mechanism, the influence of the Ethereum Foundation and its founder, and the 2024 US presidential election.

Can PoS Pass the Howey Test

As one of the most influential blockchain networks, Ethereum's transition in its consensus mechanism has attracted widespread attention. Years ago, Ethereum chose to transition from a PoW mechanism to PoS. Some believe that the PoS consensus mechanism is a more environmentally friendly and sustainable alternative to PoW, as it determines the validation nodes in the network based on the amount of tokens held. However, despite the theoretical advantages of PoS, there are still many uncertainties in its practical application.

For example, the PoS consensus mechanism may face challenges in terms of forking and governance. In a PoS network, validation nodes holding a large number of tokens have more governance power, which may lead to centralization of power and unfair governance decisions. Additionally, forking could also be a problem, as validation nodes holding a large number of tokens may tend to support their own interests rather than the overall interests of the network.

The Howey Test is one of the standards used by the US Securities and Exchange Commission (SEC) to determine whether a cryptocurrency qualifies as a security. In this test, the SEC evaluates various characteristics of the cryptocurrency, including the stability and security of its consensus mechanism. Ethereum's PoS consensus mechanism will be particularly scrutinized, as it is an important public blockchain network with far-reaching implications for the market.

There are many controversies and questions surrounding whether the PoS consensus mechanism can pass the Howey Test. On one hand, the theoretical advantages of the PoS mechanism, such as higher energy efficiency and stronger network security, are expected to support its passage of the Howey Test. On the other hand, the practical application of the PoS mechanism is still in its early stages, and its security challenges and risks have not been fully verified. Especially when it comes to Ethereum staking rewards and other economic incentive mechanisms, the PoS consensus mechanism may face more regulatory scrutiny and challenges. Therefore, whether the PoS consensus mechanism can pass the Howey Test will be a key factor in determining the approval of the Ethereum spot ETF.

Influence of the Ethereum Foundation and Vitalik Buterin

At the same time, the Ethereum Foundation and its founder, Vitalik Buterin, as core components of the Ethereum ecosystem, have a significant influence on Ethereum itself. This influence is reflected not only in technical development and network governance, but also directly affects the market's recognition of Ethereum and investors' confidence in Ethereum.

First, as the main organization driving the development of the Ethereum ecosystem, the foundation's financial support and technical advancement provide a solid foundation for Ethereum's development. The foundation's financial support enables the Ethereum network to continue its technological innovation and upgrades, maintaining its leading position in the blockchain field. Additionally, through various activities and projects such as the Ethereum Community Fund and Ecosystem Development Fund, the foundation promotes the healthy development of the Ethereum ecosystem.

Secondly, as the founder of Ethereum, Vitalik Buterin is considered the spiritual leader and technical pioneer of the Ethereum community. His statements and viewpoints directly influence the market, and his position on social media often has a significant impact. Investors and market participants often closely follow Vitalik's updates to understand his views and expectations for the future development of Ethereum.

However, this influence also raises concerns for regulatory agencies. Regulators may worry that the influence of the Ethereum Foundation and Vitalik could be used to manipulate the market, especially when it comes to Ethereum ETFs and other financial products. Regulators may be concerned that the actions and statements of the foundation and Vitalik could affect the stability of Ethereum's price and the fairness of the market, leading them to be reluctant to approve Ethereum ETFs and other financial products.

2024 US Presidential Election

Finally, in the 2024 US presidential election, Trump and Biden will once again be the main rivals, representing different political positions and attitudes that will directly influence regulatory agencies' attitudes and policies towards the cryptocurrency market.

The Trump administration has shown a tendency to support market freedom and innovation during its tenure. Trump himself has publicly expressed support for blockchain technology and digital currency, believing that they can bring new opportunities for economic growth and job creation. Under his leadership, regulatory agencies may be more inclined to take a relatively lenient stance, supporting the development and innovation of the cryptocurrency market. This stance may manifest as relatively lenient regulatory policies, more regulatory sandbox programs, and cautious regulation of new types of cryptocurrency assets rather than strict restrictions.

In contrast, the Biden administration tends to focus more on the stability of financial markets and the protection of investors. Biden and his team may pay more attention to the risks and uncertainties in the cryptocurrency market, and take more cautious and strict regulatory measures to ensure the stability and transparency of the market. This may include stricter regulatory requirements for cryptocurrency exchanges and projects, as well as more regulatory reviews and enforcement actions. The Biden administration may emphasize the compliance and transparency of the cryptocurrency market to reduce market manipulation and investor risks. This is also emphasized by the current SEC chairman at the beginning of this article.

Therefore, the different political positions and attitudes represented by Trump and Biden will directly influence regulatory agencies' attitudes and policies towards the cryptocurrency market.

Currently, the current SEC is not willing to easily expand the influence of cryptocurrencies, especially when it comes to traditional financial instruments. The SEC is concerned about the instability and risks of the cryptocurrency market, as well as its impact on the traditional financial system, thus adopting a relatively conservative approach to regulatory policies. In this context, the approval of the Ethereum spot ETF will face stricter regulatory scrutiny and requirements, undoubtedly increasing the difficulty and uncertainty of its approval.

In conclusion, the approval of the Ethereum spot ETF faces multiple challenges and obstacles. From the practical application of the PoS consensus mechanism, the influence of the Ethereum Foundation and its founder, to the attitudes and policies of regulatory agencies, these factors will collectively determine the prospects and possibilities of the approval of the Ethereum spot ETF.

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