Galaxy Digital Exec: This Is How the SEC Could Classify ETH as Security

Alex Thorn, the Head of Research at Galaxy Research, speculated that the SEC could differentiate between Ethereum (ETH) and staked Ether, possibly classifying the latter as a security.

He noted that this distinction could provide a regulatory loophole for approving spot Ethereum ETFs.

Spot Ethereum ETF Approval Loophole

In a May 21 post on X, he stated, “If the speculation about a 180 from SEC on the Ethereum ETFs is true, I would guess they try to thread a needle between ‘ETH’ NOT being a security and ‘staked ETH’ (or even more flimsily, ‘staking as a service ETH’) as BEING a security.”

if the speculation about a 180 from SEC on the ethereum ETFs is true, i would guess they try to thread a needle between “ETH” NOT being a security and “staked ETH” (or even more flimsily, “staking as a service ETH”) as BEING a security.

that would be somewhat congruent with…

— Alex Thorn (@intangiblecoins) May 21, 2024

This potential distinction could have implications for spot Ethereum ETFs, which the SEC has been reluctant to approve so far. According to Thorn, this shift would align with the SEC’s ongoing legal battles and investigations, enabling it to approve spot Ethereum ETFs while maintaining consistency with its previous arguments and positions.

However, Thorn also highlights that this approach might involve specific restrictions on spot Ethereum ETFs. He suggested that the SEC might prohibit ETFs from staking the ETH they hold.

By distinguishing between ETH and staked ETH, the SEC could allow for the introduction of spot Ethereum ETFs while maintaining a strict regulatory framework around staked assets and other altcoins.

SEC Approval Optimism

Bloomberg Intelligence ETF analysts Eric Balchunas and James Seyffart increased their predicted likelihood of a spot Ether ETF approval from 25% to 75% on Monday. This change followed discussions suggesting that the SEC might adopt a more favorable stance towards these applications.

Update: @JSeyff and I are increasing our odds of spot Ether ETF approval to 75% (up from 25%), hearing chatter this afternoon that SEC could be doing a 180 on this (increasingly political issue), so now everyone scrambling (like us everyone else assumed they’d be denied). See… https://t.co/gcxgYHz3om

— Eric Balchunas (@EricBalchunas) May 20, 2024

In a May 20 post on X, Balchunas hinted that the SEC’s increased pace toward approving the ETF could be influenced by political pressure, contrasting with the agency’s previous lack of engagement with ETF applicants.

The analysts later clarified that their increased odds only apply to 19b-4 approvals, with the SEC’s decision on the VanEck spot Ether ETF anticipated on May 23. “We also need S-1 approvals. It could be weeks to months before we see S-1 approvals and thus a live Eth ETF,” Seyffart explained.

He added, “That said, if we’re correct and we see these theoretical approvals later this week, it *should* mean that S-1 approvals are a matter of ‘when’ not ‘if.’”

Meanwhile, Ethereum’s value has surged by over 20% following news that the SEC might approve spot ETH ETFs, despite the market’s earlier consensus that approval was unlikely.