Ben Strack

Moves from Grayscale Investments and Bitwise Asset Management to pause planned ether futures ETFs came after the SEC asked them to do so, according to two sources directly familiar with the matter.&nbsp;



Industry participants told Blockworks that concerns around current ether futures liquidity levels, as well as a lack of clarity on whether ether is considered a security or a commodity, are possible rationales.&nbsp;



Grayscale, one of the crypto industry’s largest and most prominent asset managers, moved last week to register a planned ether (<a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a>) futures product with the <a href="https://blockworks.co/tag/sec" target="_blank" rel="noreferrer noopener">SEC</a>. The firm — known for its $17.2 billion Grayscale Bitcoin Trust (GBTC) — reversed course this week.



Read more: <a href="https://blockworks.co/news/grayscale-pulls-eth-etf-filing" target="_blank" rel="noreferrer noopener">Grayscale, Bitwise Pumping Brakes on ETH Futures Plans</a>



Grayscale’s pullback appears to have started a trend amongst its competitors, per a Blockworks’ review of SEC filings and the two sources familiar with the matter.&nbsp;



That trend: SEC representatives have told involved parties that the US regulator is still not yet ready to approve such products. The SEC oversees ETFs domiciled in the ETF, while the CFTC regulates crypto future trading products.&nbsp;&nbsp;



<h2 class="wp-block-heading">Direxion follows Grayscale, Bitwise’s lead&nbsp;</h2>



Fund manager Direxion became the latest to request rescinding its proposal to launch an Ether Strategy ETF, according to an SEC <a href="https://www.sec.gov/Archives/edgar/data/1424958/000119312523147943/d237384daw.htm">filing</a> on Thursday. Direxion has nearly 80 ETFs trading in the US with combined assets under management of roughly $26.4 billion, according to ETF.com.



The two sources told Blockworks this week that the SEC has recently asked a number of top would-be issuers to pull their public filings for ether futures ETFs — requesting for firms to discuss the proposals confidentially with the regulator.&nbsp;



Both sources were granted anonymity to discuss sensitive business dealings. The SEC did not return a request for comment.



The Direxion filing came a day after Bitwise submitted a <a href="https://www.sec.gov/Archives/edgar/data/1928561/000138713123006639/bitwise-aw_051723.htm">request</a> to withdraw the application for its Ethereum Strategy ETF to the SEC. This would have invested primarily in cash-settled, front-month ETH futures contracts traded on the Chicago Mercantile Exchange (CME).



An amended <a href="https://www.sec.gov/Archives/edgar/data/1976672/000113743923000658/gftn1aa052023.htm">filing</a> by Grayscale, dated Wednesday, indicated the crypto-focused asset manager was moving forward with ETF launch plans that did not include <a href="https://blockworks.co/news/grayscale-angling-for-crypto-etfs" target="_blank" rel="noreferrer noopener">its previously filed-for Ethereum Futures ETF</a>.



Spokespeople for Grayscale and Bitwise declined to comment. Direxion did not return a request for comment.&nbsp;



Valkyrie Investments and Roundhill Investments <a href="https://blockworks.co/news/issuers-piggyback-on-grayscale-proposal" target="_blank" rel="noreferrer noopener">also filed for ether futures ETFs</a> last week. A Valkyrie representative declined to comment on its plans, while Roundhill Investments could not immediately be reached.



<h2 class="wp-block-heading">SEC not ready?</h2>



The SEC approved bitcoin futures ETFs in 2021. But Matthew Sigel, head of digital assets research at fund group VanEck, told Blockworks the CME ether futures market is not yet liquid enough to support an ETF.&nbsp;



VanEck has previously filed for a bitcoin ETF. It also filed for an ether futures ETF in 2021 before <a href="https://blockworks.co/news/vaneck-proshares-seek-to-withdraw-requests-to-launch-ethereum-etfs" target="_blank" rel="noreferrer noopener">withdrawing the application</a> just days later. ProShares did the same, though the fund group <a href="https://blockworks.co/news/first-bitcoin-futures-etf-nears-1b-on-first-day-of-trading" target="_blank" rel="noreferrer noopener">launched the first bitcoin futures ETF</a> a couple months later.



“Because of the SEC&#8217;s previous haphazard approach to a bitcoin ETF, we&#8217;ve already spent considerable time and resources filing and re-filing applications in hopes the timing would align to allow us first to market with a physical bitcoin ETF,” Sigel said. “However since the case against ETH futures ETF is quite clear from a liquidity perspective, we figured in this case, why bother?”



The average daily volume for CME ether futures last month clocked in at 5,580 contracts, according to CME Group <a href="https://www.cmegroup.com/daily_bulletin/monthly_volume/Web_ADV_Report_CME.pdf">data</a>.&nbsp;



That substantially trailed the average daily volume of 9,713 contracts for bitcoin futures over that same period. Open interest for ether futures and bitcoin futures during the month: 3,578 and contracts and 13,412 contracts, respectively.&nbsp;&nbsp;



Sigel added that ETH futures liquidity levels would likely have to more than double before the regulator would approve an ether futures fund.



<h2 class="wp-block-heading">Beyond ether liquidity&nbsp;</h2>



Liquidity might not be the only issue the SEC has with the ether futures ETF proposals.&nbsp;



Bryan Armour, director of passive strategies research at Morningstar, said he believes any read of the SEC’s disinterest in approving an ether futures ETF is “conjecture” at this point.



“Bitcoin has advantages over ether in terms of its integration into the financial system as a payment method … and its deeper liquidity,” he told Blockworks in an email on Thursday. “But the main point of contention for the SEC may be its uncertain classification of ether as a commodity or security.”



While <a href="https://blockworks.co/news/bitcoin-and-ether-are-commodities-says-cftc-in-binance-lawsuit" target="_blank" rel="noreferrer noopener">the CFTC considers ether to be a commodity</a>, SEC Chair Gensler has said he believes most crypto assets, excluding bitcoin, are securities.



Ether’s qualification as a commodity came into question after Ethereum moved from a proof-of-work model to proof of stake last year, Armour said.&nbsp;



“Staking could change the outcome of the Howey Test, which the SEC uses to determine what qualifies as an investment contract,” he said. “My expectation is that the SEC needs more time to get comfortable with its classification before approving Ethereum-related ETFs.”



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SEC Not Ready to Approve Ether Futures ETFs, Sources Say — But Why?

<div id="highlights-block_61a547b87f773" class="highlights">
 <ul>
 <li>The Ethereum network will be an integral part of our lives going forward, says Kelly Intelligence’s founder and CEO </li>
 <li>VanEck and ProShares had revealed plans in August to launch Ethereum futures products but subsequently withdrew the applications</li>
 </ul>
 
</div>



Kelly Intelligence is looking to launch an Ethereum futures ETF a little more than a month after the first bitcoin futures ETFs hit the US market.&nbsp;



The Denver-based firm’s proposed actively managed fund would invest in cash-settled ether futures contracts traded on commodity exchanges registered with the Commodity Futures Trading Commission (CFTC), according to <a href="https://www.sec.gov/Archives/edgar/data/1873280/000089418921008363/kellyethereumfuturesetf485.htm">a regulatory disclosure</a> filed on Monday.&nbsp;&nbsp;



The only such exchange to offer these contracts is the Chicago Mercantile Exchange (CME), which rolled out ether futures contracts earlier this year after unveiling bitcoin futures contracts in December 2017.&nbsp;



CME earlier this month announced that it would <a href="https://cms.blockworks.co/cme-group-plots-launch-of-micro-ether-futures/">add micro ether futures</a> — sized at one-tenth of one ether — on Dec. 6.&nbsp;



CME Group executives said at the time that the micro ether futures offering would provide an efficient, cost-effective way for individual and institutional investors to hedge their ether price risk or more nimbly execute ether trading strategies. The plans came as liquidity in ether futures contracts has steadily grown among institutional traders since their launch in February, the CME leaders added.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“Kelly Intelligence’s interest in ether is predicated on the fact that we are at the start of the fourth industrial revolution &#8211; what we call the intelligence revolution — where the Ethereum network will be an integral part of our lives going forward,” Kevin Kelly, the firm’s founder and CEO, told Blockworks in an email.</blockquote>



Kelly declined to comment specifically on the filing or potential conversations the firm has had with regulators.&nbsp;



The planned Kelly Ethereum Ether Strategy ETF may replace futures contracts approaching expiration with similar contracts that have a later expiration, the filing notes.



In addition to ether futures contracts, the fund may invest in pooled investment vehicles and exchange-traded products that provide exposure to ether. It would not invest in ether or other digital assets directly.



Penserra Capital Management is slated to subadvise the fund. The filing does not indicate an expense ratio for the proposed offering.



<h3 class="wp-block-heading">Bitcoin futures ETFs</h3>



The filing follows the launch of several bitcoin futures ETFs. The first of which, the ProShares Bitcoin Strategy ETF (BITO), has grown to roughly $1.4 billion in assets under management since its Oct. 19 debut. The US Securities and Exchange Commission (SEC) has not yet greenlit ETFs that would invest in bitcoin directly.



VanEck and ProShares had revealed plans in August to launch <a href="https://cms.blockworks.co/vaneck-and-proshares-apply-for-ethereum-futures-etfs/">Ethereum futures products</a> but subsequently <a href="https://cms.blockworks.co/vaneck-proshares-seek-to-withdraw-requests-to-launch-ethereum-etfs/">withdrew the applications</a>. Some industry professionals said at the time that the SEC likely told the issuers that such products would not be approved any time soon.



Trey Griggs, CEO for GSR’s US business, <a href="https://cms.blockworks.co/when-could-an-ethereum-futures-etf-hit-the-us-market/">told Blockworks last month</a> that he believed Ethereum had sufficient trading history for the SEC to approve a futures-based product. But the market for ether futures is likely not liquid enough to support the volume of inflows that an ETF could trigger, Noelle Acheson, head of market insights at Genesis, said at the time.&nbsp;



Bloomberg Intelligence ETF Analyst James Seyffart said in October that an Ethereum futures-based ETF could launch sometime in the first half of 2022, noting that he believes one will launch before a spot bitcoin ETF.&nbsp;

Bitcoin

Kelly Intelligence Plans Ethereum Futures ETF

<div id="highlights-block_6185703796c2e" class="highlights">
 <ul>
 <li>Eventual normalization of monetary policy and investors’ greater focus on ESG could hurt bitcoin’s outlook</li>
 <li>Stiff competition from similar layer-1s like Solana is a disadvantage for Ethereum that bitcoin does not endure</li>
 </ul>
 
</div>



Ethereum (ETH) could continue to benefit from the sharp growth of decentralized finance, while the eventual normalization of monetary policy could put downward pressure on bitcoin’s “digital gold” proposition, according to recent research from JPMorgan.&nbsp;



Ethereum’s all-time price high this week of more than $4,600 came as CME Group announced <a href="https://cms.blockworks.co/cme-group-plots-launch-of-micro-ether-futures/" target="_blank" rel="noreferrer noopener">plans to launch micro ether futures</a> next month and Facebook’s upcoming name change to Meta. The latter announcement boosted ether, given that several metaverse platforms are already based on the Ethereum platform.



The crypto asset’s price was $4,500, as of 2 pm ET on Friday, according to <a href="https://www.coingecko.com/en" target="_blank" rel="noreferrer noopener">CoinGecko</a>, up 0.4% in the last 24 hours.



“There is little doubt that momentum traders have amplified the recent rise in [ether] prices, but we find no evidence on our metrics as yet that momentum signals are in overbought territory,” according to a Nov. 3 note by JPMorgan analysts, led by Nikolaos Panigirtzoglou.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“Instead, the renewed enthusiasm about Ethereum appears to have been less technical and more fundamental, driven by investors’ excitement about metaverse and virtual reality applications following Facebook’s announcement.”</blockquote>



Since its launch in February, CME ether futures have seen a steep upward flow trajectory underpinning this year’s ether bull market, analysts said, as the number of contracts has risen to 6,500, representing about $1.5 billion. The micro futures offering is expected to bring participation from a broader set of investors.



Though Ethereum’s blockchain dominance in the smart contract, DeFi and NFT spaces has increased its appeal to both institutional and retail investors as the leading application cryptocurrency, it faces stiff competition from other blockchains, a separate JPMorgan report published last week states. These competitors include the Binance Smart Chain (BSC), Polkadot (DOT), Cardano (ADA), Terra (LUNA) and Solana (SOL).&nbsp;



<h3 class="wp-block-heading">Ethereum versus bitcoin</h3>



Digital currency prime broker Genesis noted in its <a href="https://cms.blockworks.co/genesis-reports-continued-growth-in-demand-for-eth-compared-to-btc-in-q3/" target="_blank" rel="noreferrer noopener">third quarter report</a> that though demand for Ethereum outpaced demand for bitcoin during Q3, layer-1s such as SOL, LUNA, Avalanche (AVAX) and Fantom (FTM) reduced Ethereum’s market share.&nbsp;



“This [competition] creates the risk that the substantial increase in the Ethereum network activity over the coming years embedded in the current price of $4100 might not materialize,” JPMorgan analysts explained.



Meanwhile, bitcoin is unique in terms of investors viewing it as digital gold, and faces no competition from other cryptocurrencies, the research notes.&nbsp;



The rise in bond yields, however, and the eventual normalization of monetary policy is putting downward pressure on bitcoin as a form of digital gold, the same way higher real yields have been putting downward pressure on traditional gold, the analysts said.



Tapering of monthly bond purchases at a reduction of $15 billion a month will soon begin due to the “substantial further progress” of the economy, Federal Reserve Chairman Jerome Powell <a href="https://cms.blockworks.co/fed-to-begin-tapering-this-month-bottlenecks-will-persist-well-into-2022/" target="_blank" rel="noreferrer noopener">said on Wednesday</a>. He noted that the central bank elected to keep interest rates near zero.



“With [ether] deriving its value from its applications, ranging from DeFi to gaming to NFTs and stablecoins, it appears less susceptible than bitcoin to higher real yields,” the JPMorgan report states.



In addition, the analysts pointed out that investors’ focus on environmental, social and governance, or ESG, issues has shifted attention away from the energy-intensive bitcoin blockchain to the Ethereum blockchain, which is expected to become more energy-efficient by the end of 2022 with Ethereum 2.0.



Yassine Elmandjra, a blockchain and crypto-asset analyst for Ark Invest, said in a tweet that Ethereum’s market capitalization would ultimately grow larger than bitcoin’s.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">will happen and it&#39;s ok&mdash; Yassine Elmandjra (@yassineARK) <a href="https://twitter.com/yassineARK/status/1456330260367216647?ref_src=twsrc%5Etfw">November 4, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Bitcoin’s price was 61,175 as of 2 pm ET on Friday, CoinGecko data showed — a 0.3% decrease from a day ago. Its market capitalization is nearly $1.2 trillion, which is a bit more than double the market cap of Ethereum.&nbsp;



“In a scenario where the volatility of bitcoin subsides next year to about twice the volatility of gold,” the analysts said, “a bitcoin price target of $73,000 seems reasonable for 2022.”

JPMorgan analysts: ETH could have more upside than BTC

<div id="highlights-block_618161f22c190" class="highlights">
 <ul>
 <li>Ether, at about $4,500, is up roughly 170% since CME’s February launch of ether futures contracts</li>
 <li>Micro ether futures to follow CME’s introduction of micro bitcoin futures in May</li>
 </ul>
 
</div>



CME Group announced Tuesday its plan to add Micro ether futures as liquidity in ether futures contracts has steadily grown among institutional traders since their launch earlier this year.&nbsp;



The new contract will be cash-settled and will be based on the <a href="https://www.cmegroup.com/trading/cryptocurrency-indices/cf-ethereum-reference-rate.html" target="_blank" rel="noreferrer noopener">CME CF Ether-Dollar Reference Rate</a>, which serves as a once-a-day reference rate of the US dollar price of ether. Micro Ether futures will be listed on CME and subject to its rules.  



The upcoming launch, planned for December 6, is pending regulatory approval. The new offering comes after CME introduced cash-settled <a href="https://cms.blockworks.co/cme-ether-futures-launch-quietly-but-with-big-industry-implications/">ether futures con</a><a href="https://cms.blockworks.co/cme-ether-futures-launch-quietly-but-with-big-industry-implications/" target="_blank" rel="noreferrer noopener">t</a><a href="https://cms.blockworks.co/cme-ether-futures-launch-quietly-but-with-big-industry-implications/">racts</a> in February, noting at the time that the product would be an additional tool for investors amid the demand for and growth of bitcoin futures and options markets.  



Since CME’s ether futures launch in February, more than 675,500 contracts have traded. Ethereum’s price has gone up about 170% in that span, according to Giovanni Vicioso, CME Group’s senior director of equity and alternative investment products.



Ethereum had a price of $4,520, as of Noon ET, according to <a href="https://www.coingecko.com/en" target="_blank" rel="noreferrer noopener">CoinGecko</a>. Its market capitalization was roughly $535 billion at that time, which is nearly half of bitcoin’s. 



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“We’ve had requests from clients who are interested in accessing ether using our contract either for exposure or to manage ether price risk…for a smaller contract,” Vicioso told Blockworks. </blockquote>



Micro ether futures are sized at one-tenth of one ether. The new offering will provide an efficient, cost-effective way for individual and institutional investors to hedge their ether price risk or more nimbly execute ether trading strategies, company executives said.



CME unveiled bitcoin futures contracts in December 2017 and added <a href="https://www.cmegroup.com/trading/micro-bitcoin-futures.html" target="_blank" rel="noreferrer noopener">micro bitcoin futures</a> — also one-tenth the size of one bitcoin — in May. Micro Bitcoin futures have traded more than 2.7 million contracts since then.



Since CME’s ether futures launch in February, about 2,200 accounts have traded the product, Vicioso noted. Ether futures averaged 53 large open-interest holders — an entity that holds at least 25 contracts — in October. Bitcoin futures did not reach that level of large open-interest holders until more than two years after it launched, he explained.&nbsp;



Ether futures volume, which represented about 5% of bitcoin futures volume earlier this year, grew to about 80% of bitcoin futures volume in September, the executive added.



“Ether [futures] has really had a much quicker adoption in terms of institutions and sophisticated traders that are accessing that contract,” Vicioso said.



Discussion around crypto futures contracts has ballooned recently amid the launch of the first bitcoin futures ETFs in the US last month. Industry professionals <a href="https://cms.blockworks.co/when-could-an-ethereum-futures-etf-hit-the-us-market/" target="_blank" rel="noreferrer noopener">have shared various opinions</a> of when an Ethereum futures ETF could launch, with Bloomberg Intelligence Analyst James Seyffart predicting one could hit the market in the first half of 2022.



Vicioso called the bitcoin futures ETF launches a milestone but declined to comment on potential ether futures ETFs.



“Certainly, ETFs are a welcome addition and a complementary product to the futures,” he said.