Former U.S. Securities and Exchange Commission Chairman Jay Clayton broke down the SEC's decision regarding spot Ethereum ETH +1.06% exchange-traded funds (ETFs) and what the next steps are.

Clayton noted that the approved listings bode favorably for the product, adding that he thinks their trading will be "inevitable." But there are still thorny questions surrounding the product.

The former SEC chairman first noted that Ethereum ETF approval comes in two steps.

"There’s the listing approval, which is what happened yesterday, and then there’s the approval of the product itself, which is still pending," Clayton said Friday in an interview with CNBC.

What comes next before trading begins is whether the funds' registration statements are approved. A registration statement provides transparency regarding a fund's objectives, expenses, risks, fees, management and organization structure so that potential investors can be fully informed.

Still, Clayton thinks such approval is bound to happen.

"I think it means it’s inevitable," he said. "We went through this same process with the bitcoin product, where almost all or all of the questions were decided. The question that was decided yesterday, to speak technically, is that the market is efficacious enough for this product to be listed on the exchange. That is what was decided, but there are other questions out there."

It was this question of market efficacy that prevented Clayton from approving crypto ETFs while helming the SEC between 2017 and 2020. However, he noted that spot markets for both bitcoin and ether have "developed remarkably over time." As The Block's Data Dashboard shows, spot crypto trading for exchanges hit their all-time highest months in mid-2021, with March 2024 reaching third place.

Ethereum ETFs vs. Bitcoin ETFs

Clayton also noted the difference in approvals for Ethereum ETF and Bitcoin ETFs, the latter of which occurred on Jan. 10. 

The two underlying cryptocurrencies had different answers for whether they were securities or commodities. According to the CFTC and even current SEC chairman Gary Gensler, Bitcoin is a commodity. However, the "SEC has not definitively said up to now, and they still have not definitively said, that underlying transactions in Ethereum are not securities transactions," Clayton noted.

The difference between a commodity and a security is whether investors rely on others for the investment's value growth. Clayton compares it to a Broadway ticket. If a show is forthcoming, and the production team must still develop the script, obtain the venue and in other ways develop the final show, then a ticket for that show would be a security. Once the show hits the stage years later and the work is done, a ticket for that show would be a commodity.

"That’s how something that is used to build out a network using a token to build out the network, and say if this network gets built out you’re going to get a lot of money, is a security," he explained. "And then when the network is built out, the token is just for use on the network."

Though these and other questions regarding Ethereum ETFs remain undecided, estimations suggest the funds could begin trading in July or August — with JPMorgan speculating that it will be well before November, The Block previously reported.