Coinbase, a cryptocurrency exchange in the United States, has strongly supported Grayscale’s proposal to convert its Ethereum Trust into a spot Ether exchange-traded product (ETP), citing Ether’s non-security status as one of its main grounds.

On February 22, Coinbase’s chief legal officer, Paul Grewal, posted the company’s 27-page statement describing the legal, technological, and economic reasons why the US Securities and Exchange Commission should authorize an Ether-based ETP.

Coinbase submitted five primary arguments, including that Ether ETH$3,012 is properly classed as a commodity rather than a security, as evidenced by the U.S. Commodity Futures Trading Commission’s acceptance of ETH futures, statements by SEC officials, and court rulings.

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

The proof-of-stake consensus mechanism of Ethereum offers a robust governance model that demonstrates strength across various parameters such as ownership concentration, consensus, liquidity, and governance. This setup helps mitigate risks associated with fraud and manipulation, providing a secure foundation for the Ethereum network.

The letter’s second point contends that the SEC’s approval of spot Bitcoin exchange-traded funds (ETFs) applies similarly, if not more forcefully, to an Ethereum ETP.

Market data suggest that ETH ownership and trading activity are extremely distributed, with high liquidity and tight spreads indicating an efficient and mature market, it argued.

Furthermore, ETH futures ETFs are comparable to spot Ethereum-based funds, thus it would be arbitrary for the SEC to allow one but not the other, considering their close relationship, according to Coinbase.

The firm also stated that the technological and operational security safeguards included in Ethereum’s blockchain “significantly limits ETH’s susceptibility to fraud and manipulation.”

Furthermore, the asset’s market depth spread tightness, and price connection across spot markets are strong indicators of a market resistant to fraud and manipulation.

Finally, Coinbase stated that it uses sophisticated market surveillance to monitor trade on its platforms, as well as a partnership with the Chicago Mercantile Exchange.

The letter was submitted in response to NYSE Arca’s proposed rule modification for the listing and trading of Grayscale Ethereum Trust shares as an Ethereum ETP. The SEC seeks comments on these proposed alterations to gather public input before reaching a decision.

The Road Ahead: The SEC has yet to make a decision on Coinbase’s proposal or on any potential ETH ETF applications. Analysts predict a more cautious approach compared to the Bitcoin ETF approval process, given the concentration risk concerns surrounding Ethereum.