On May 24, Jay Clayton, the former SEC chairman, appeared on CNBC’s “Squawk Box” to discuss the SEC’s approval (on May 23) of 19B-4 filings for several US-based spot Ethereum ETFs.

Here are the key points from the discussion:

  1. Approval Process: Clayton clarified that there are two steps in the approval process for such products. The first step, which was achieved, is the listing approval. The second step, which is pending, is the approval of the product itself, involving the registration statement.
  2. Implications: The approval of the listing does not mean that trading can begin immediately. It signifies a step towards inevitability, similar to the process with Bitcoin ETFs.
  3. Differences from Bitcoin ETFs: Unlike the Bitcoin ETF approval, which was compelled by a judge’s decision, the Ethereum ETF approval faces different circumstances. A key issue has been the classification of transactions in Ethereum and whether they are considered securities.
  4. Legislative Influence: Clayton mentioned that recent congressional actions, including a new crypto bill — i.e. the Financial Innovation and Technology for the 21st Century Act (FIT21) — have clarified aspects of digital asset custody and trading. This legislation appears to influence the SEC’s stance and indicates a desire from Congress to see digital assets like Ethereum trade similarly to securities.
  5. Historical Context: Clayton discussed his previous hesitancy to approve such products due to concerns about market efficacy. He now sees the market for Ethereum as having developed sufficiently to warrant consideration for such a spot ETF.
  6. Commodity vs. Security: He used an analogy involving Broadway tickets to explain how something can transition from being a security to a commodity. Initially, investments in a project represent securities. Once the project (or network) is established, the same investments (or tokens) may be treated as commodities used within the network.

The approval of an ETF application by the U.S. Securities and Exchange Commission (SEC) is a two-stage process.

Stage 1: 19b-4 Filing Approval

The first stage involves the approval of the 19b-4 filing, which is a rule change proposal submitted by the exchange where the ETF will be listed (e.g., Nasdaq, CBOE, or NYSE). This filing outlines the proposed rules and procedures for listing and trading the ETF. The SEC reviews the 19b-4 filing to ensure that it complies with the Securities Exchange Act of 1934 and other applicable regulations. If the SEC approves the 19b-4 filing, it means that the exchange is allowed to list the ETF, but the product is not yet ready for launch.

Stage 2: Registration Statement Approval

The second stage involves the approval of the ETF issuer’s registration statement (e.g., Form S-1 or Form N-1A). The registration statement is a disclosure document that provides detailed information about the ETF, including its investment objectives, strategies, risks, and fees. The SEC reviews the registration statement to ensure that it complies with the Securities Act of 1933 and the Investment Company Act of 1940, and that it provides adequate disclosure to investors. If the SEC approves the registration statement, the ETF issuer can proceed with launching the product and making it available for trading on the approved exchange.

It’s important to note that the approval of the 19b-4 filing does not guarantee the approval of the registration statement, and vice versa. The ETF issuer must successfully navigate both stages of the approval process before the ETF can be launched and traded in the market.