Despite lacking the support of a mature futures market and facing potential obstacles of being classified as a security, the Solana ETF application process is steadily advancing in anticipation of the new regulatory environment.
Written by: Weilin, PANews
The Cboe BZX Exchange recently submitted applications for four Solana ETFs. With the U.S. election day over, Trump is set to take office, and SEC Chairman Gary Gensler has announced his resignation effective January next year, the regulatory environment for cryptocurrency ETFs is expected to undergo significant changes, creating new opportunities for the approval of the Solana ETF.
Analysts believe that the SEC will shift from a 'law enforcement-based' regulatory approach back to a 'disclosure-based' model. If the Solana ETF is approved, it will stimulate huge demand in the cryptocurrency ETF market. Despite lacking the support of a mature futures market and facing potential obstacles of being classified as a security, the Solana ETF application process is steadily advancing in anticipation of the new regulatory environment.
Four institutions rushed to apply for the Solana ETF, which was once 'almost impossible.'
On November 22, Cboe BZX Exchange documents showed that the exchange proposed to list and trade four types of Solana ETFs on its platform. These ETFs are initiated by Bitwise, VanEck, 21Shares, and Canary Funds, classified as 'Commodity-Based Trust Shares' and submitted in accordance with Rule 14.11(e)(4). If the SEC officially accepts them, the final approval deadline is expected to be in early August 2025.
In addition to Bitcoin and Ethereum, the following cryptocurrencies are also awaiting ETF approval:
XRP ETF: Canary Capital, Bitwise, and 21Shares have submitted applications.
Solana ETF: Canary Capital, 21Shares, Bitwise, and VanEck are seeking approval.
Litecoin ETF: Canary Capital has submitted an application.
HBAR ETF: Canary Capital has submitted an application.
Nate Geraci, president of ETF Store, stated on November 21 that there are reports that at least one issuer has also attempted ETF applications for ADA (Cardano) or AVAX (Avalanche).
Currently, some industry insiders believe that the chances of the Solana ETF being approved rank ahead of other ETFs.
However, just three months ago, there were reports indicating that CBOE had removed the 19b-4 applications for two potential Solana ETFs from its 'Pending Rule Changes' page on its website. At that time, Bloomberg ETF analyst Eric Balchunas commented that after Cboe removed the Solana ETF's 19b-4 application from its website, the chances of the Solana ETF being approved were almost nonexistent. But now, the new regulatory environment may bring significant changes.
Regulatory changes are expected: the SEC will return to a disclosure-based regulatory model.
After the U.S. election day, the elected president Trump and the most crypto-friendly Congress in history are set to take office. Additionally, SEC Chairman Gary Gensler, who has been criticized by the crypto industry, will resign on January 20, 2025, bringing more optimism to crypto supporters.
Nate Geraci, president of ETF Store, stated that he believes the Solana ETF is very likely to be approved before the end of next year. 'It seems that the SEC is communicating with the issuers regarding this product, which is clearly a positive signal.'
Alexander Blume, CEO of Two Prime Digital Assets, agrees with this view, stating that if the issuers were not highly confident in their success, they would not waste time and resources on this matter.
Matthew Sigel, the head of digital asset research at VanEck, the earliest applicant for the Solana ETF, stated, 'It is precisely the SEC under Gary Gensler that has broken the long-standing rule-based traditional process and is regulating through enforcement. Returning to a disclosure-based conventional system will bring more possibilities for innovation. I believe the chances of launching the Solana ETF before the end of next year are very high.'
However, in contrast to VanEck's optimistic attitude, Robert Mitchnik, head of the BlackRock digital asset division, the largest Bitcoin ETF, stated that the company is not very interested in other crypto products besides Bitcoin and Ethereum.
SEC Chairman Gary Gensler will resign in January 2025
On January 20 of next year, Gensler will resign from his position as SEC Chairman, coinciding with Trump's inauguration. Recently, this news has continuously boosted the cryptocurrency market, with Bitcoin prices consistently setting historical highs as it approaches the $100,000 mark.
Data shows that the SEC set a historical record in the 2024 fiscal year, initiating 583 enforcement actions and securing $8.2 billion in financial compensation orders, the highest amount in SEC history. Compared to 2023, this represents a 14% increase in enforcement actions. Cases involving cryptocurrencies, private equity funds, and other high-risk financial misconduct are the agency's priorities. Now, Gensler's resignation is expected to reverse the regulatory environment for cryptocurrencies.
The aforementioned Alexander Blume stated, 'Through regulated traditional financial channels such as banks and exchanges, institutional and retail investors can access cryptocurrencies via ETFs, which will open up previously non-existent pools of funds. It's like replacing (large) fire hoses with (small) pool hoses, which means potential market momentum is enhanced, and speculative trading may have a greater impact.'
Solana is experiencing strong growth momentum, but what potential application challenges does it face?
Boosted by meme market sentiment, Solana's growth momentum this year has been significant. Solana's native token SOL broke through the previous all-time high of $259.96 set at the end of 2021, reaching $263.83 on November 23, with a market capitalization of $121.1 billion, making it the fourth largest cryptocurrency.
What obstacles might the Solana ETF face in its application? Looking back at previous Ethereum ETF applications, the SEC adopted an analysis framework called 'Ark Analysis Test,' provided by Ark Funds and adopted by the SEC. This framework outlines several key reasons that ultimately led to the approval of the Ethereum ETF: Firstly, the existence of futures trading: the approval of a spot ETF must be based on a mature futures trading market, particularly on officially recognized exchanges such as CME (Chicago Mercantile Exchange). Secondly, the deviation between futures ETF prices and spot prices cannot be too large. This proves that the market will not be manipulated due to the spot ETF. Additionally, a certain level of market maturity is required. The futures ETF has been operating for a period and has shown stable performance, further supporting the maturity and stability of the spot market.
Rob Marrocco, Vice President and Global Head of ETF Listings at CBOE, pointed out that the only feasible way to bring the Solana ETF to market is to first launch the Solana futures ETF and then pave the way for the spot ETF. He further stated that even if the Solana futures ETF is launched, it will need to be traded for a period to establish a performance record, and this process may take a long time, potentially requiring a significant amount of time to complete.
Although Bitcoin and Ethereum ETFs have been approved, they have a significant difference from Solana: Bitcoin and Ethereum trade futures on the regulated Chicago Mercantile Exchange (CME), which allows the SEC to monitor them. Solana, however, was listed as one of the 19 unregistered securities when the SEC sued Binance and Coinbase Global Inc. in 2023, which also presents legal obstacles to the approval of the Solana ETF.
Nevertheless, previously, Matthew Sigel, head of digital asset research at VanEck, pointed out that VanEck considers Solana (SOL) to be a commodity, similar to Bitcoin (BTC) and Ethereum (ETH). This view is based on an evolving legal perspective, as courts and regulators have begun to recognize that certain crypto assets may behave as securities in the primary market but more like commodities in the secondary market.
Sigel further mentioned that Solana has made significant progress in decentralization over the past year; currently, the top 100 holders control about 27% of the supply, which has decreased significantly from a year ago. The top 10 addresses now hold less than 9%. Solana has over 1500 validator nodes distributed across 41 countries, operating more than 300 data centers, with a Bittorrent coefficient of 18, surpassing most networks it monitors. The upcoming Firedancer client will further enhance decentralization, ensuring that no single entity can dominate the blockchain. He believes these advancements make Solana's decentralization characteristics more prominent, resembling digital commodities such as Bitcoin and Ethereum.
Sigel also mentioned a key legal precedent—the 2018 case of CFTC v. My Big Coin. In this case, the defense argued that the token was not a commodity because there were no futures contracts associated with it. However, the U.S. District Court disagreed, stating that the definition of a commodity under the Commodity Exchange Act (CEA) is very broad, encompassing all goods, items, and all services, rights, and interests related to these goods, and that these goods may have futures contracts in the future.
Sigel believes that this precedent may apply to Solana, indicating that even without futures contracts, Solana can still be regarded as a commodity. This classification is crucial for the approval of the Solana ETF, as it provides legal grounds for Solana to be recognized as a commodity, allowing it to enter the approval process for commodity-based ETFs.
Therefore, he stated that the approval of the ETF does not necessarily require an active futures market. Although the trading volume of the related futures market is small, ETFs for shipping, energy, and uranium already exist. 'We believe it can be approved even without CME futures contracts,' he said, suggesting that exchanges could substitute market monitoring sharing agreements.
If approved, the next question is how much demand there will be for the spot Solana ETF. Grayscale Investments already operates the Grayscale Solana Trust, which currently manages approximately $70 million in assets. Bloomberg analyst James Seyffart believes that since Solana's market capitalization is about 6% of Bitcoin's, the demand for this ETF will grow proportionately, with total demand expected to reach around $3 billion.
