The U.S. Securities and Exchange Commission (SEC) seems poised to reject several applications for Ethereum ETFs (exchange-traded funds), according to a recent report by Reuters. In recent weeks, conversations between U.S. issuers and the SEC have leaned heavily towards a negative outcome.

Key players in the market, such as VanEck and ARK Investment Management, alongside seven other issuers, face massive roadblocks as the SEC scrutinizes their proposals to track Ethereum’s spot price.

Unproductive Discussions

The recent interactions between ETF issuers and SEC officials have been largely disappointing from the issuers’ perspective. These discussions have lacked the engagement and detail-oriented queries that marked earlier meetings, particularly those leading to the approval of Bitcoin spot ETFs.

Four individuals involved in the talks, who preferred to remain anonymous, described the meetings as one-sided, with little to no substantive feedback from SEC staff on the proposals laid out.

This shift in the SEC’s approach is notable especially considering the background of the agency’s chair, Gary Gensler, a known cryptocurrency skeptic. His leadership has seen prolonged resistance to spot Bitcoin ETFs, citing concerns over market manipulation.

However, the tide had seemed to turn with the approval of Bitcoin spot ETFs, following a successful court challenge by Grayscale Investments. This past approval had sparked hope among issuers that Ethereum products might follow.

Despite attempts by issuers to align their Ethereum ETF proposals with the previously approved Bitcoin and Ethereum futures-based ETFs, SEC staff have remained largely unresponsive. This has led to an expectation among the issuers that the SEC will ultimately deny these Ethereum spot ETF applications.

Market Implications and Continued Efforts

The potential denial is not just a procedural setback but also casts a shadow on Ethereum’s market performance. Hong Fang, president of crypto exchange OKX, noted that Ethereum’s price has been underperforming compared to Bitcoin, which has seen a 51% increase this year. This underperformance is partly due to market anticipation of a negative ruling from the SEC, adding downward pressure on Ethereum prices.

In response to the anticipated rejections, some issuers have expressed intentions to submit additional disclosures to the SEC, hoping to keep the dialogues open and address any possible concerns that might be influencing the SEC’s apprehensions.

The only disclosed meeting thus far involved crypto exchange Coinbase, focusing on Grayscale’s bid to convert its Ethereum Trust into an ETF. The arguments presented in these meetings stressed the high correlation between Ethereum futures and spot markets, mirroring the logic that secured the approval of Bitcoin spot ETFs.

However, skepticism remains high within the SEC regarding the depth and quality of market data for Ethereum, compared to the more established Bitcoin futures market. Matt Hougan, Chief Investment Officer at Bitwise Asset Management, suggested that the SEC’s reluctance could be attributed to a desire for more comprehensive data to validate the market’s maturity and stability.

The ongoing uncertainty and the SEC’s hesitancy to move forward with Ethereum ETFs may potentially lead to further legal challenges, similar to those previously faced by Bitcoin ETF proposals. Industry insiders remain hopeful yet cautious, acknowledging that the approval may require further litigation or a significant change in the SEC’s view on cryptocurrency-related products.

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