U.S. Ethereum ETF Could Raise Concentration Risks: Report

Published: Feb 21, 2024
Written By:
Vignesh Karunanidhi
Milk Road Writer

The entry of Ethereum exchange-traded funds (ETFs) in America could overly concentrate validation power, warns S&P Global Ratings.

In a recent report, analysts cautioned that massive asset managers selecting centralized staking services may undermine Ethereum’s core decentralization outlook.

  • S&P expects SEC approval of spot Ethereum ETFs as soon as May.
  • Notes funds are less likely to use protocols like Lido for yields.
  • Instead, it favors institutional crypto custodians like Coinbase.

S&P predicts the Securities and Exchange Commission could greenlight spot-based ETH funds this quarter as the first milestone. 

While decentralized liquid staking protocols exist, S&P believes major ETF issuers will favor trusted giants like Coinbase over alternatives like Lido.

However, the analysts argue that presents centralization issues given the outsized impact fund inflows could have.

S&P says Ethereum ETFs can cause centralization issues

“U.S. spot ether ETFs that incorporate staking could become large enough to change validator concentrations,” said S&P’s Andrew O’Neill and Alexandre Birry.

They note that Coinbase already supports over half of existing Bitcoin ETFs as custodians while empowering global ETH staking funds.

The combination of name recognition and institutional stature makes the exchange a prime destination for American fund giants.

“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.,” said S&P.

S&P suggests asset managers could mitigate risks by spreading holdings and validation duties across multiple qualified crypto custodians rather than concentrating overwhelmingly on Coinbase.

They also expect ETH ETFs to be approved as early as May 2024. The calculation differs tremendously for traditional fund administrators unfamiliar with crypto custody and direct blockchain interaction. 

Vignesh Karunanidhi

Vignesh has been a seasoned professional in the crypto space since 2017. He has been writing for over 6 years and specializes in writing and editing various types of crypto content, including news articles, long-form pieces, and blog posts, all focused on sharing the beauty of blockchain and crypto.

Vignesh Karunanidhi
Milk Road Writer
Vignesh has been a seasoned professional in the crypto space since 2017. He has been writing for over 6 years and specializes in writing and editing various types of crypto content, including news articles, long-form pieces, and blog posts, all focused on sharing the beauty of blockchain and crypto.