In a surprising move, the SEC earlier today, approved the highly anticipated ETH exchange-traded fund (ETF). Although the trading volume of the ETH ETF is expected to be lower than the first days of the BTC ETF, the inevitable developments following this approval are incredibly exciting.
Like the BTC ETF, the ETH ETF will draw significant attention, leading to a rapid acceleration of new on-chain use cases for both Ethereum and Bitcoin. But unlike Bitcoin, Ethereum is purpose-built to support simple and complex financial services like interest bearing deposits and lending and borrowing, as well as novel activities like staking that pay investors interest or rewards without giving up control over their investments. While ETFs tied to activities like staking have not yet been approved, this is exactly where ETF issuers are headed next. They can and will seek to leverage existing yield-bearing and audited contracts and begin developing their own smart contracts in the near future.
The ETH ETF will Accelerate Adoption
Massive Liquidity
ETF issuers have access to unprecedented levels of liquidity. This access to capital from institutional and retail investors alike who were until now hesitant to engage in the crypto market can significantly expand market depth and stability. If there is an opportunity to generate additional value from these assets, they will seize it; it is their obligation to investors.
The growing number of crypto ETFs is analogous to the introduction of mutual funds in the 1920s. When mutual funds first appeared, they provided individual investors access to diversified portfolios and professional management, significantly increasing liquidity and market participation. Similarly, the ETH ETF will attract a broader range of investors, leading to greater market participation and will drive innovation.
For a more recent example, consider the impact of the introduction of ETFs in the early 1990s. Then, as they do now, ETFs provided investors with access to assets that are subject to regulatory oversight by financial authorities. The increased liquidity and ease of access offered by ETFs played a significant role in the growth of the financial markets over the past few decades. Just as ETFs transformed traditional finance, the ETH ETF has the potential to do the same for the crypto market, bringing in more participants and fostering innovation. While this was also true for the BTC ETF, the difference here is that Ethereum has the capability today to support instruments that mirror traditional finance and new instruments are under near-constant design, all with transparency that are making financial traditionalists take notice. Disruption is happening in real-time, and these forward-thinking ETF issuers are pushing their advantage.
Push for Regulatory Adoption
The ETF issuers are well-organized and intricately understand the regulatory landscape. They will advocate for the recognition of this new asset class in ways that crypto natives have been slow to achieve. Electronic trading platforms were introduced in the early 2000s. Financial behemoths like Goldman Sachs and JPMorgan Chase successfully pushed for regulatory changes to accommodate these new systems, leading to widespread adoption and enhanced market efficiency.
- Goldman Sachs: In the early 2000s, Goldman Sachs played a pivotal role in advocating for the approval of electronic trading platforms. Their efforts helped pave the way for regulatory acceptance, leading to a transformation in how trades were executed, increasing efficiency, and lowering costs for market participants.
- JPMorgan Chase: Under the leadership of Jamie Dimon, JPMorgan Chase has been a prominent advocate for blockchain technology in the financial industry. The bank launched its own digital coin, JPM Coin, to facilitate instant payments using blockchain technology. Jamie Dimon’s support for blockchain, despite his earlier skepticism about cryptocurrencies, underscores the bank’s influence in pushing for regulatory frameworks that accommodate blockchain innovations. This effort has helped legitimize and promote the adoption of blockchain technology within traditional financial systems.
These examples highlight how established financial institutions successfully drive regulatory change, paving the way for new financial products and market innovations. Similarly, the issuers of the ETH ETF can leverage their organizational strength and regulatory knowledge to advocate for this new asset class. And they will, because it is in the best interest of their investors.
Democratizing Finance
While it may not happen as Bitcoin’s creator initially envisioned, the approval of the ETH ETF should lead to greater open access to financial markets. Openness and access was the vision of Satoshi Nakamoto, who’s Bitcoin whitepaper started all of this back in 2008. Even though the BTC and ETH ETFs may not align perfectly with Satoshi’s vision then, decentralized smart contracts that allow investors to participate in the financial system and are impervious to human manipulation are a step we should all embrace now. Such advancement is similar to how online trading platforms democratized access to financial markets in the 1990s by allowing individual investors to trade stocks directly, bypassing traditional brokerage models and reducing costs. ETH ETF provides more access to markets and more access is always good..
Crypto OGs might argue that the introduction of ETFs could lead to centralization and dilution of cryptocurrencies’ core decentralized ethos. They might contend that ETFs could attract traditional financial players who prioritize profit over the original principles of decentralization and financial sovereignty. While this argument isn’t without merit, it is important to recognize that the broader participation facilitated by ETFs can also strengthen the overall ecosystem. An influx of institutional and retail investors can provide the necessary capital to drive innovation and development in the crypto space. ETFs also can serve as entry points for new investors who may become more engaged with decentralized finance (DeFi) and other on-chain activities. By promoting transparency, education, and accessibility, we can ensure that the foundational principles of decentralization are upheld and even enhanced, as more participants bring diversity and robustness to the network.
Why Does NODE40 Care?
NODE40 was founded by engineers passionate about blockchain technology. From a business perspective, we understand that financial reporting is crucial for the industry’s growth and legitimacy. Given the recent history of failures like FTX and Celsius, as an industry, we must get it right. Our behaviors and actions must be unimpeachable.. Success requires transparency. The beauty of blockchain is its accessible data that can be captured and transformed into meaningful information. If you’ve ever looked at a smart contract, this may sound daunting, but immutable, transparent data can be programmatically processed, and technology allows us to solve the problem. As my co-founder Sean likes to say, “It’s all just math!” Echoing Max Tegmark’s perspective that everything is fundamentally mathematical, we too believe that with the right approach, NODE40 will set the standard for delivering flawless financial reporting that facilitates the growth of our industry.
