Crypto exchange Coinbase has thrown its support behind Grayscale's application to offer a spot Ethereum exchange-traded fund (ETF) by converting its current Ethereum Trust product—and urged the United States Securities and Exchange Commission (SEC) to grant approval.

As the only cryptocurrency exchange traded on the U.S. stock exchange, Coinbase is a prominent voice in the crypto ecosystem. On Wednesday, the company—which is the Grayscale Ethereum Trust's crypto custodian—submitted a detailed report highlighting Ethereum's market maturity and regulatory compliance, arguing that those two aspects make ETH a commodity akin to Bitcoin.

“The market has long understood that ETH is not a security,” Coinbase wrote in the letter. “Senior officials of the Commission have publicly said as much on several occasions over the past six years, and neither the Commission nor its staff has disavowed this position, even after the merge."

For years, the cryptocurrency industry has pushed for regulatory clarity about the true legal nature of tokens and digital assets. Cryptocurrency and token issuers often resist the idea of digital assets being considered securities because it would heavily increase their regulatory burden, expose them to potential lawsuits by investors when goals and expectations aren’t met, and severely limit their ability to reach a broader global market.


"The characteristics of the Ether (ETH) market and the exchange’s surveillance-sharing agreement with the Chicago Mercantile Exchange Inc. (CME)... support the position that the exchange’s proposed rule change should be approved for virtually identical reasons articulated by the Commission with respect to spot Bitcoin exchange-traded products (ETPs)," the letter reads.

Coinbase also praised Ethereum's decentralized governance, noting its effectiveness in mitigating risks of fraud and manipulation. This topic was already taken into consideration by the SEC to argue that Ethereum was, in fact, not a security given its current conditions. That's because there is not one entity, company, or group that can control the network, unilaterally decide its model, and play a determinant role in fulfilling investors' expectations.


This backing arrives amid broader discussions in the financial industry about the potential risks associated with concentration in the Ethereum network, particularly concerning spot Ethereum ETFs that include staking options. Financial giants like S&P Global and JPMorgan have expressed such concerns, emphasizing the need for diversified staking strategies to prevent network centralization.

“An increase in ether staking ETFs could affect the mix of validators participating in the Ethereum network's consensus mechanism,” analysts at S&P Global argue. “The effect of U.S. spot ether ETFs on concentration risk, be it positive or negative, could be significant, which makes constant monitoring of concentration risk even more important,”

In January, the SEC's approval of 11 Bitcoin spot ETFs marked a significant regulatory milestone for the crypto industry, boosting the price of Bitcoin to break the $50,000 barrier in February for the first time since 2021. The rest of the crypto market followed this trend, boosting the total market cap of the crypto ecosystem to more than $2 trillion according to CoinGecko.

Edited by Andrew Hayward

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