The critical moment for the SEC to decide whether to approve a spot Ethereum ETF is approaching — in fact on the very day of today Eastern time. The SEC needs to make an initial final decision on applications from VanEck, Ark/21Shares on the 23rd and 24th respectively, while the final decision on Grayscale needs to be made by the 30th. Most people had already given up hope on the SEC approving an Ethereum ETF just a week’s ago, but starting this week, we are observing a streak of price surge, with Ethereum spiking 20% to $3,700 and Bitcoin nearly reaching $72,000, breaking the $70,000 mark for the first time in 40 days on May 21st. Why did this happen? It all started with Bloomberg ETF analyst Eric Balchunas' surprising reversal in stance.
Bloomberg ETF analyst Eric Balchunas made an unusually timed post early this week stating that he has significantly increased the approval likelihood from 25% to 75%. This change is based on some rumors he recently heard, suggesting that the US SEC might make a 180-degree shift on this increasingly politicised issue. However, another analyst, James Seyffart, subsequently added that although the likelihood of the 19b-4 rule passing has increased to 75%, the future still requires the approval of the S-1 application. This means that even if the 19b-4 rule is approved, the formal launch of an Ethereum spot ETF will still take some time.
As the end of May approaches, the crypto community's attention is fully focused on the Ethereum ETF approval, nevertheless, I was conservative on the projection initially. The SEC has been investigating whether Ethereum, the main native asset of the Ethereum blockchain, is a security, and launched a formal probe after the network transitioned from proof-of-work to proof-of-stake consensus. If Ethereum is deemed a security by the SEC, that could be one reason for the SEC to reject spot Ethereum ETF applications. The SEC would at most approve one of the rules, but not more. I am reading Manufacturing Consent these days and am just wondering on who will benefit from the price rise. However, it is true that we cannot take the regulators swinging attitudes for granted, since even Gensler himself made a comment claiming Ethereum is not considered security in his lecture at MIT in 2019.
The Ethereal debate continues to burn. Even the founder of the bankrupt investment firm Three Arrows Capital, Zhu Su, has posted on social media platforms stating that he is bullish on Ethereum regardless of whether its spot ETF is approved or not. Zhu Su predicted that if the Ethereum spot ETF is approved, Ethereum will rise to a new high of $5,400, and Bitcoin will also reach a new high of $80,000. Another indicator related to DTCC also excites the market. A DTCC spokesperson stated that being listed was part of the preparation for launching a new ETF product, following standard procedures, and emphasised that this did not mean the ETF had received any form of regulatory approval or passed any other review process. However, shortly after that, the SEC officially approved it. Will history repeat itself this time? The market is eagerly anticipating this. The SEC also asks major exchanges to modify Ethereum ETF filings, which is interpreted by the market as a signal that an approval is near.
The US government's attitude towards cryptocurrencies is very ambiguous. On the one hand, regulatory authorities are continuously increasing enforcement efforts, relentlessly cracking down on cryptocurrencies. In just the first half of the year, the SEC has sued multiple major institutions, including Genesis, Kraken, Binance, and Coinbase. On the other hand, the US government is the government holding the most bitcoins. According to Glassnode data, as of July 27, the US government held approximately 194,188 bitcoins, accounting for about 1% of the total bitcoin supply, worth around $5.68 billion. Although these bitcoins were all seized for free, compared to other governments, the US government has not rushed to cash out the confiscated bitcoins, but has chosen to hold them instead. Despite the fact that digital assets have existed for more than a decade, a comprehensive regulatory framework has not yet been established in the US, and the current regulatory framework lacks clarity.
Against this backdrop, the FIT21 bill was finally born under the watchful eyes of millions. The bill aims to clarify the roles of the SEC and CFTC in regulating cryptocurrencies. The passage of the bill is seen as an early win for the crypto industry, with Coinbase's CEO describing it as a "total victory." Of course, the bill draws sharp criticisms from the SEC Chair Gary Gensler, who publicly expressed his objections to the FIT21 bill. He believes that HR 4763 undermines the classification of crypto assets as investment contracts, which would exempt them from SEC oversight and hinder investor protection efforts. Since the final bill still needs presidential approval before implementation, Biden had previously vowed not to let it pass smoothly. However, Biden suddenly announced that if the FIT21 bill passes the congressional vote, he will not veto it, and even called on Congress to cooperate on a comprehensive, balanced regulatory framework for digital assets.
Why did Biden suddenly change his stance? It should be noted that he previously had a very tough attitude, and Gensler has been a staunch supporter of Biden, so how could their stances be so vastly different? Biden's shift in attitude towards cryptocurrencies may be driven by political motives as his biggest competitor Trump is openly pro-crypto.
US regulation on businesses, whether centralised or decentralised, is always tied with the complexity of bipartisan politics. For the ETF approval, I still hold a conservative view, as I cannot understand how SEC may be able to wrap its head and identify Ethereum to not be a security, although crypto industry’s arguments are that ETH is a technical product not a security (looping to Thomas’ great essay Staking or Not, ETH is Not Security). If it does, it also makes sense as we can never sit in the shoes of the regulators and understand the mandates on their table and under the table. After all, Hong Kong has already approved ether ETFs and these ETFs opened to a lukewarm sentiment - I had the fortune to discuss with Mr Joseph Chan, Under Secretary for Financial Services and the Treasury of the HK SAR Financial Services and Treasury Bureau, and he expressed confidence in Hong Kong’s crypto ETF future and a sense of “no idea” about another jurisdiction (US). After all, these are two quite different market in terms of size and jurisdictional power.
Regardless, for the past two months, Ethereum on-chain activity and meme coins have been largely lifeless, which has led to a significant drop in the previously expensive Ethereum GAS, now basically hovering around the historical daily low of 6 gwei. Furthermore, the recent layer0 witch hunt incident has also caused many studios to stop on-chain interactions, further keeping Ethereum GAS fees low. This is good news for transaction users, but it's difficult for Ethereum ecosystem projects because the participating users have decreased significantly, and even the studios that used to brush transactions have stopped, so naturally, the data for various projects will be difficult to look at. However, the Ethereum spot ETF hotbed will attract a lot of capital inflow, although the original ecosystem has limited absorption of capital. If Ethereum ETF is passed, new meme coins and market hot spots may emerge on the Ethereum chain, a round of new wealth creation waves may happen on Ethereum like those on Solana and Base.
