Breakingviews: Ether ETFs spotlight crypto’s big ask for Trump

Republican presidential nominee Donald Trump once professed himself “not a fan” of bitcoin; now, he says he will end the U.S. government’s “anti-crypto crusade.” Digital currencies have indeed strained against regulators wary of a speculative free-for-all. Those restraints loom over the debut of new funds tied to ether, the second-largest cryptocurrency, which are held back from offering certain sweeteners. If Trump wins in November, loosening limitations on these crypto-for-the-masses products from Fidelity, BlackRock and their ilk seems an obvious target.

The giants of exchange-traded funds, which command trillions of investor dollars, already brought bitcoin closer to the adults’ table of finance by establishing products directly holding the currency. They’re doing the same for ether, last Tuesday launching new funds that drew over $100 million in net inflows and $1 billion in trading volume on day one. The average ETF sees about $1 million of opening day trading, according to Bitwise Chief Investment Officer Matt Hougan.

It’s still much less than the $4.6 billion that spot bitcoin ETFs attracted on landing in January. After all, ether is less well-known, with the dollar value of all tokens amounting to about 30% of bitcoin’s worth. More importantly, the funds lack ether’s key selling point. The technology depends on “proof of stake” to validate transactions, which involves users putting up coins under the inducement of receiving so-called staking rewards. Put simply, they earn a yield.

Issuers including Fidelity and Franklin Templeton initially intended to include staking in their funds, but ultimately launched without it, a distinct disadvantage. They likely had little choice: Gary Gensler, head of the U.S. Securities and Exchange Commission, has indicated that staking is tantamount to marketing a security, with all the regulation that implies.

With ether ETFs expected to draw only 25% to 30% of the demand of bitcoin funds, that dampener is an annoyance for fund managers and the fees they reap from their products’ adoption. Of course, things could change. Crypto hawkers have beat U.S. regulators in court before. A recent district court order affirming that cryptocurrencies including ether are commodities could help establish the legal basis for moving to a laxer regulatory regime.

Grinding through lawsuits, though, takes time. The confluence of buzzy products backed by blue-chip fund managers with a live issue to resolve offers an easy issue for a potential Republican administration to score points on. Trump’s campaign, currently ahead in the polls, is accepting donations in digital coins. The industry may foresee it paying back out in kind.