Coinbase Backs Grayscale for Spot Ethereum ETF By Converting ETHE

• Coinbase is actively pushing for SEC approval to list the Grayscale Ethereum Trust for trading, emphasizing Ethereum’s status as a commodity rather than a security.
• This move aligns with Coinbase’s efforts to expand its custodial business, as it already serves as a custodian for several recently approved US Bitcoin ETFs.

In a recent development, crypto exchange Coinbase has actively advocated for the U.S. Securities and Exchange Commission (SEC) to greenlight the trading listing of the Grayscale Ethereum Trust, as revealed by the company’s chief legal officer, Paul Grewal.

Today @coinbase responded to @SECGov‘s request for comment on the proposed @Grayscale Ether Trust ($ETHE) ETP. 27 pages and 96 citations that provide the (1) legal, (2) technical, and (3) economic rationale for approval. 1/6

— paulgrewal.eth (@iampaulgrewal) February 21, 2024

Grewal took to the social media platform X to share the update, stating that Coinbase has promptly responded to the SEC’s call for comment. In their response, Coinbase has meticulously outlined the “legal, technical, and economic rationale” crucial for securing approval. In his post on X, Grewal wrote:

Our letter lays out what anyone knows who’s paid even the slightest bit of attention to the subject: ETH is not a security. In fact, before and after the Merge, the SEC, the CFTC, and the market have treated ETH not as a security but a commodity.

Coinbase emphasized to the SEC that the approval granted for spot Bitcoin ETFs logically extends, if not strengthens, the case for listing and trading Grayscale’s spot ether ETF.

In its communication to the regulatory body, Coinbase highlighted that Ethereum’s (ETH) market attributes, such as its robust liquidity, narrow spreads, and strong price correlation across various trading platforms, signify a market that is resilient against fraudulent activities and manipulation. Additionally, Coinbase pointed out that Ethereum’s trading volume in terms of dollar value surpasses that of a significant portion of S&P 500 stocks, even when considering their aggregate market capitalization.

Spot Ether ETFs Can Bring Concentration Risks

Analysis from S&P Global Ratings suggests that the approval of proposed Ethereum exchange-traded funds (ETFs) in the U.S., incorporating staking features, might heighten Ethereum’s concentration risk. In a report published on Tuesday, February 20, S&P analysts Andrew O’Neill and Alexandre Birry said:

“U.S. spot ether ETFs that incorporate staking could become large enough to change validator concentrations in the Ethereum network, for better or worse. It is therefore critical to understand how ETF issuers’ choices will drive concentration risks.”

Presently, Lido, a decentralized liquid staking protocol, holds the top spot as the largest Ethereum validator, closely followed by Coinbase. However, the analysts at S&P predict that spot ether staking ETFs are more inclined to opt for institutional crypto custodians over decentralized protocols like Lido.

Thus, the approval of spot Bitcoin ETFs could significantly benefit Coinbase’s custodial business. Coinbase serves as a custodian for eight out of the 11 recently sanctioned U.S. Bitcoin ETFs. Additionally, it is designated as a staking institution by three of the four largest Ether-staking ETFs outside the United States.

Ether is taking the spotlight away from Bitcoin, fueled by speculation that the forthcoming wave of spot US crypto exchange-traded funds will prioritize the second-largest digital asset, leading to a surge in investor interest. Ether has surged by 30% this year, outpacing Bitcoin’s 22% advance.

Moreover, in the derivatives sector, open interest in CME Group’s Ether futures market is nearing a record peak. The rise in outstanding contracts reflects institutional investors’ growing demand for exposure to Ether.

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