How to define whether Ethereum is a security? The US SEC and Wall Street may have found a balance
Influenced by the news that Ethereum ETF may be approved, Ethereum has soared recently. Due to the lack of official opinions, it is mainly market speculation. So can ETF be approved? Combining various news and analysis, this article believes that the possibility of Ethereum ETF approval is very high, and the key time node is probably May 23 or later. The reason for the later time may be process problems rather than key disputes. Let's briefly discuss the core issues below.
After Ethereum switched to the PoS mechanism, whether it is a security or not is the biggest point of contention between the US SEC and Wall Street financial institutions. After Ethereum switched from PoW to PoS, users used tokens to stake, maintain the network and earn income, which violated the Securities Act. More specifically, the US SEC believes that the process of earning income by staking ETH is similar to an "investment contract." Currently, many crypto tokens are PoS mechanisms. If the US SEC recognizes Ethereum's PoS mechanism, what should other cryptocurrencies based on the PoS mechanism do? According to Bitpush, in June 2023, when the US Securities and Exchange Commission (SEC) filed a lawsuit against Binance, it clearly believed that many "unregistered securities" tokens were listed on Binance, including but not limited to Solana (SOL), Cardano (ADA), Polygon (MATIC), Coti (COTI), Algorand (ALGO), Filecoin (FIL), Cosmos (ATOM), Sandbox (SAND), Axie Infinity (AXS), Decentraland (MANA). (Jinqun homepage)
However, judging from some current news, the US SEC and Wall Street seem to have found a balance point; in addition, the US crypto policy may also undergo major adjustments. Therefore, if the US SEC approves the Ethereum ETF, it will also be good news for many mainstream crypto assets, and will have a more far-reaching impact on the crypto industry than the Bitcoin ETF (the US SEC has not questioned the asset attributes of Bitcoin).
So, what is the balance point between the US SEC and Wall Street regarding the Ethereum ETF? In February of this year, VanEck submitted a revised S-1A document to the SEC. This document was the first amendment to the S-1 registration statement submitted by many issuers that did not include a pledge clause. In recent days, Fidelity and Grayscale have successively removed the pledge section from the S-1 registration statement and resubmitted the documents to the SEC. So, will the "balance point" mentioned above be: if the ETH in the ETF is not pledged, then Ethereum is not a security; conversely, the Ethereum used for pledge will be defined as a "security."
Ethereum’s non-securities attributes still have bugs, and loosening of US policies may lead to a major change in the SEC’s attitude
As mentioned above, the balance point found by the US SEC and Wall Street is whether ETH should be pledged. Does this logic make sense?
Suppose A pledges his ETH, unpledges it after a period of time, and sells it on Coinbase; the sold ETH finally flows into VanEck. In this process, the ETH pledged by A is a security, so after it is unpledged, is the same ETH a security? If it is a security, then is the Ethereum ETF that eventually flows into VanEck considered a security? The definition of ETH as a security will be very difficult. At the same time, for other cryptocurrencies, taking ETH as a reference, can SOL, FIL, etc., which were previously considered securities by the US SEC, be determined by this method to be securities? If this method is used, in fact, the US SEC will greatly increase its own regulatory difficulties.
In essence, this article believes that the US SEC is indeed loosening its rules, which may be mainly related to US policies. According to relevant news reports, one of the points is that the SAB 121 rule that has plagued the crypto industry before may be overturned. The core content of SAB 121 is that companies that hold cryptocurrencies are required to record the cryptocurrencies held by customers as liabilities on their balance sheets. However, the cryptocurrency industry generally believes that this regulation is too harsh, which actually hinders custodians or companies from holding crypto assets on behalf of their customers, which is not conducive to the further development of the industry. Therefore, it has long been trying to overturn SAB 121 through lobbying and other means. In other words, assuming that the SAB 121 clause is overturned, the shackles that restrict the development of the crypto industry in the United States will be broken. Another political factor is whether the FIT 21 (also known as HR 4763) bill can be approved, which is a new bill aimed at clarifying the regulatory framework for cryptocurrencies. The current progress is that all members of the U.S. House of Representatives have voted through FIT 21, and the bill will enter the Senate to discuss whether to approve it, and finally submit it to U.S. President Biden for signature.
Overall, if the two clauses of the US bill are passed, the US crypto regulation will be much looser. Then, the relaxation of Ethereum is very necessary at this time, and for other cryptocurrencies, it may also be gradually relaxed in the future, because this is most likely the overall direction of US national policy.
How will the market develop in the future?
As mentioned above, the U.S. policy has a profound impact on the crypto industry, and it is not without reason that the U.S. policy is beginning to shift toward a more relaxed approach.
According to Bitpush, the new rules of the Financial Accounting Standards Board (FASB) of the United States require that the fair value of Bitcoin be officially used for accounting in fiscal years beginning after December 15, 2024. David Marcus, former president of PayPal and former head of Meta cryptocurrency, commented that this seemingly minor change in accounting standards is actually of great significance. It eliminates a major obstacle for companies to include Bitcoin in their balance sheets, and 2024 will be an important milestone for Bitcoin. Then the passage of the two bills SAB 121 and FIT 21 mentioned above will also have a further profound impact on the crypto industry.
In addition to the trend of US encryption policy, the US macro-economy also affects Bitcoin and the market. Last Wednesday, the United States released data. The year-on-year growth rates of CPI and core CPI in April slowed down from March, increasing by 3.4% and 3.6% respectively, the lowest growth rate in three years; the month-on-month growth of CPI in April did not stabilize as expected in March, but slowed down to 0.3%, and the core CPI growth slowed down to 0.3% as expected, achieving the first slowdown in growth in half a year. This is also a cooling down after three consecutive months of higher-than-expected growth. After the CPI was released, investors raised their expectations for the Fed's interest rate cuts. Intraday swap contract pricing showed that traders expected the probability of a 25 basis point rate cut by the Fed in September to rise to more than 80%. The three major US stock indices rose collectively. Affected by the overall optimistic sentiment in the market, Bitcoin has also begun to move out of the bullish situation.
Summarize
Overall, this article believes that the Ethereum ETF is relatively likely to be approved. The balance point between the US SEC and Wall Street on whether Ethereum is a security may be: if the ETH in the ETF is not pledged, then Ethereum is not a security; conversely, Ethereum used for pledge will be defined as a "security." The reason why the US SEC's attitude has changed significantly is that the US crypto policy has begun to shift towards a more open and relaxed state.
Once the Ethereum ETF is approved, it will not only benefit ETH, but also the entire mainstream asset class. From the market point of view, Bitcoin is expected to maintain a bullish trend and tend to fluctuate upward due to the easing of US encryption policies (mainly the recent SAB 121 and FIT 21 bills) and the influence of US macro policies. If the Ethereum ETF is approved, it may see a large increase due to the positive stimulus.
