Status of U.S. Ether ETFs in Limbo as Firms Rescind Filings

A brief explanation of Ethereum

For those totally new to the crypto space, Ethereum is a technology that's based on the blockchain - a type of system that allows digital information to be distributed, but not copied. You may have heard of Bitcoin, which was the first type of this technology, primarily used for transferring digital money anonymously but is now heavily used as an investment.

Ethereum takes this idea further. Not only can you transfer money using Ethereum, but you can also use it to build and run applications. You can think of Ethereum as a giant, globally distributed computer where anyone can build and run their programs. The ecosystem for these programs is known as "decentralized finance", or "de-fi".

DeFi is a bit like online banking, but more flexible. With traditional online banking, your transactions go through an intermediary. With DeFi on Ethereum, you can lend, borrow, earn interest, trade assets, buy insurance, and more, directly with other people, without needing a bank or a broker. Everything is controlled by computer programs, called smart contracts, running on the Ethereum blockchain.

Now, the currency in this ecosystem is called Ether. Just like you can invest in a company's stock, you can invest in Ether. Most people buy Ether in hopes that its price will go up over time, but keep in mind that it has historically been very volatile.

Ether is also used to pay for transactions and services on the Ethereum network. As more people use the applications built on Ethereum, the more Ether could potentially be in demand, which could also increase its price. This makes it distinct from Bitcoin, which functions more like digital gold.

What these Ether ETFs would have done

An Ether ETF would have offered investors immense flexibility. Right now, investing in Ether means purchasing on a cryptocurrency exchange and holding it online in a "hot wallet", or going the self-custody offline by transferring it to a "cold wallet".

The main disadvantage of these methods is a knowledge barrier. It can be quite a step up for investors accustomed to stocks and ETFs to go trading cryptocurrencies. Moreover, very few firms allow you to hold Ether in a tax-advantaged account like a Roth IRA.

An Ether ETF would have solved this by providing exchange-traded, transparent exposure to Ether. With these ETFs, investors could invest in any brokerage account like any other stock while benefitting from regulation, transparency, and high liquidity.

It's worth noting that in Canada, physically backed Ether ETFs already exist, and have been trading on the market for some time now with relatively minimal issues. However, the U.S. industry appears to be lagging behind and lacking the same range of offerings.

Let's look at the canceled Direxion Ether Strategy ETF. According to its prospectus, this ETF would have invested in cash settled, front-month Ether futures traded on the Chicago Mercantile Exchange, backed by collateral consisting of money market funds or short-term, high-quality debt.

Unlike the Canadian Ether ETFs, the Direxion ETF would not have invested in Ether directly. By using futures, the Direxion ETF is attempting to track the spot price of Ether as closely as possible. However, this would likely have been imperfect due to the nature of futures.

It remains to be seen if other firms will follow Grayscale and Direxion's example by withdrawing their filings or staying the course and hoping for approval from the SEC. However, one thing is for certain: the intersection of digital assets with the ETF industry is only beginning. I expect to see more regulatory issues and new, unanticipated problems to solve.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.