Spot Ether ETFs Could Increase Ethereum’s Concentration Risk, Says S&P Global
An analysis from S&P Global Ratings suggests that the approval of proposed Ethereum (ETH) exchange-traded funds (ETFs) in the U.S., which are set to incorporate staking, could raise Ethereum’s concentration risk.
S&P analysts predict that the U.S. Securities and Exchange Commission (SEC) will greenlight spot ether ETFs as early as May 2022, which marks the initial approval deadline for such funds. Several major players in the financial industry, including BlackRock and Fidelity, have filed for spot ether ETFs.
However, according to the S&P analysts, it is unlikely that spot ether staking ETFs will opt for decentralized protocols like Lido, currently the largest Ethereum validator, followed by Coinbase.
The S&P analysts, Andrew O’Neill and Alexandre Birry, highlighted the importance of understanding ETF issuers’ choices in order to comprehend the concentration risks that may arise. They stated, “U.S. spot ether ETFs that incorporate staking could become large enough to change validator concentrations in the Ethereum network, for better or worse.”
Alongside BlackRock and Fidelity, other applicants such as Ark Invest and Franklin Templeton are also looking to generate additional yield through staking the underlying ether.
Despite the prevailing concentration risk, the S&P analysts believe that spot ether staking ETFs will likely choose an institutional crypto custodian instead of decentralized protocols like Lido. The analysts emphasized that the impact on concentration will vary depending on whether issuers diversify their stakes across multiple custodians.
Highlighting Coinbase’s role as a custodian and staking institution, the analysts noted, “Coinbase acts as a custodian in eight of the 11 recently approved U.S. bitcoin ETFs and is named as a staking institution by three of the four largest ether staking ETFs outside the U.S.,” adding that the emergence of new digital asset custodians could help mitigate concentration risks by enabling ETF issuers to spread their stakes across different entities.
This warning echoes the concerns raised by JPMorgan analysts, who recently highlighted Ethereum’s concentration risk, with Lido being the largest validator. According to the JPMorgan analysts, centralization poses risks to the Ethereum network, as a small group of liquidity providers or node operators could potentially act as a single point of failure or collude to create an oligopoly that promotes their own interests at the expense of the community.
As the approval of spot ether ETFs in the U.S. draws nearer, regulators and market participants will closely monitor the potential impact on Ethereum’s concentration risk and evaluate the measures taken by ETF issuers to mitigate this risk.
Analyst comment
Negative news: The approval of spot ether ETFs in the U.S. could increase Ethereum’s concentration risk, according to S&P Global Ratings. The analysts predict the SEC will approve these ETFs by May 2022, but they believe that the ETFs will likely choose institutional custodians instead of decentralized protocols, potentially exacerbating concentration risks. This concentration risk has been previously highlighted by JPMorgan analysts. Regulators and market participants will closely monitor the situation and evaluate measures to mitigate the risk.
