Coinbase defends Grayscale's application for an Ethereum-based exchange-traded product, citing Ethereum's classification as a commodity and highlighting market efficiency and security measures.
Leading U.S. cryptocurrency exchange Coinbase has firmly supported Grayscale's efforts to convert its Ethereum Trust into an Ether exchange-traded product (ETP). One of the key arguments put forth by Coinbase is the assertion that Ether should not be classified as a security.
Today, Coinbase's chief legal officer, Paul Grewal, unveiled the company's comprehensive 27-page letter outlining the legal, technical, and economic rationale behind advocating for the approval of an Ether-based ETP by the U.S. Securities and Exchange Commission (SEC).
Coinbase presented five major arguments, emphasizing that Ether (ETH) should be categorized as a commodity rather than a security. This stance aligns with the approval of ETH futures by the U.S. Commodity Futures Trading Commission (CFTC), as well as statements made by SEC officials and court rulings.
Furthermore, Coinbase highlighted that the SEC has not raised objections to the CFTC's treatment of ETH as a commodity.
"Our letter articulates what anyone who has even minimally followed this matter knows: ETH does not fit the definition of a security," remarked Grewal. "Both before and after the Merge, ETH has been regarded by the SEC, the CFTC, and the market as a commodity."
In addition to its classification as a commodity, Coinbase underscored Ethereum's proof-of-stake consensus mechanism, which boasts strong governance and demonstrates robust characteristics in terms of ownership concentration, consensus, liquidity, and governance, thereby reducing the risks of fraud and manipulation.
Today @coinbase responded to @SECGov's request for comment on the proposed @Grayscale Ether Trust ($ETHE) ETP. We provided a detailed 27-page letter with 96 citations, outlining the legal, technical, and economic rationale for approval. 1/6
The second argument in the letter contends that the SEC's approval of spot Bitcoin exchange-traded funds (ETFs) should equally apply, if not more strongly, to an Ethereum ETP.
Coinbase referenced market data indicating widespread ownership and trading activity of ETH, characterized by high liquidity and tight spreads, which are indicative of a mature and efficient market.
Moreover, Coinbase argued that ETH futures ETFs and spot Ethereum-based funds are similar products, and it would be arbitrary for the SEC to approve one while rejecting the other, given their close correlation.
The letter also emphasized the technological and operational security measures inherent in Ethereum's blockchain, which significantly mitigate ETH's susceptibility to fraud and manipulation.
Furthermore, Coinbase pointed out the asset's market depth, tight spreads, and price correlation across spot markets as evidence of a market resilient to fraudulent activities and manipulation.
Finally, Coinbase highlighted its sophisticated market surveillance capabilities for monitoring trading activities on its platforms, along with its partnership with the Chicago Mercantile Exchange.
This letter was submitted in response to a proposed rule change by NYSE Arca to list and trade shares of the Grayscale Ethereum Trust as an Ethereum ETP. The SEC typically requests public comments on proposed rule changes to gather feedback before making a decision.
Coinbase now advocates for the approval of spot ether ETFs. Our arguments include: 1) ETH is a commodity, 2) SEC approved spot BTC ETFs (and ETH futures ETFs), 3) ETH is technologically resistant to fraud & manipulation, 4) Deep spot ETH markets, and 5) CME ETH futures market surveillance. Exciting developments! pic.twitter.com/DGbLpc8bW7
Ether ETFs could "increase concentration risk"
Just two days prior, analysts from rating agency S&P Global expressed concerns regarding spot Ethereum ETFs that incorporate staking, which could introduce new concentration risks to the blockchain network.
Some applicants for spot Ethereum ETFs, such as ARK Invest and Franklin Templeton, are considering allowing staking in their funds.
"The rise in ether staking ETFs may impact the mix of validators participating in the Ethereum network's consensus mechanism," explained S&P 500 managing director Andrew O'Neill.
"The involvement of institutional custodians could alleviate the current concentration on the Lido decentralized staking protocol. However, it might also introduce new concentration risk, especially if a single entity is selected to stake the majority of ether included in these ETFs."
According to Dune Analytics, Lido presently holds a 31.5% share of all staked Ethereum.