The Breakdown - ETH Futures ETFs Get Set to Trade as Government Shut Down Looms

Episode Date: September 30, 2023

On today's episode, NLW looks at a set of late breaking developments that could see ETH Futures ETF's trading next week, as well as the implications for crypto and the economy of a looming government shutdown. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Friday, September 29th, and today we are talking ETF approvals. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us in the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, lots of action to wrap up your week. We're going to talk a little bit of

ETF announcements and then we're going to get into the government shutdown and of course give you all of the information that you need. Now we start with the SEC in the world of ETFs. That organization has been busy over the past few days making decisions on a variety of different crypto applications. Now, there are currently three major batches of crypto ETF applications that are being considered. On Thursday, four spot Bitcoin ETFs were delayed, including the BlackRock application. To additional spot Bitcoin ETFs were already delayed on Tuesday, announcements delaying the rest of the similar applications are expected to follow today and are likely to be published by the time this show is released. The next deadline for the SEC to consider approving spot

Bitcoin ETFs is on January 10th. That's an important one because it's the final deadline for the ARC 21 shares application, so it will require an explanation from the SEC rather than just a simple delay. The second batch are the Ethereum spot ETFs, which were also delayed. On Wednesday, deferred their decision on products from Vanek and Arc21 shares, the next deadline for regulatory consideration falls on December 26th. The SEC can delay further on these products with the final deadline falling in May. Now, overall, the delay of spot crypto ETFs has not been particularly surprising. As much as people have wanted the legal decision from the grayscale suit to force the SEC's hand, that court order is still able to be appealed, and there is nothing really compelling the

SEC to move forward with spot ETFs for the time being. Now, the more interesting developments surround Ethereum futures-based ETFs. Throughout August, at least 24 applications were filed, including some products offering short Ethereum exposure and combined long exposure to Bitcoin and Ethereum within a single fund. Throughout the week, there have been rumblings that the SEC was preparing to approve futures-based Ethereum products, asking investment firms to update their documents by Friday afternoon. The rumor was that ETFs could begin trading as soon as Tuesday. On Thursday morning, Banach debuted two 30-second advertisements for their Ethereum futures product, which would trade under the ticker EFute.

Van Eck are going with the tagline, enter the ether, and commenting on the ad, Eric Valcunis, the senior ETH analyst at Bloomberg said, as we've been saying both with ETH futures, but especially with Spot Bitcoin, it will be a marketing war like we've never seen, since they all do the same thing and launch on the same day. Unprecedented.

Now, later in the day, Vanek updated their prospectus for the fund. The ETF will only charge 66 basis points in fees. This is below the dominant pro-shares Bitcoin Futures ZETF, which is ticker symbol BITO, which charges 95 basis points. The lowest fee product seems to be roundhill at just 19 basis points. Also on Thursday, Valkyri announced that they would begin buying Ethereum futures on Friday in anticipation of altering the strategy of their existing Bitcoin futures ETHUES. The fund will now hold half Bitcoin futures and half Ethereum futures. The new strategy will be formally adopted on Monday under the existing ticker symbol BTF.

Later yesterday as well, Valkyrie's chief investment officer, Stephen McClurg, said that both Vaneck and ProShares had been given the green light to launch their dedicated Ethereum futures ETFs on Monday. A pro-share spokesperson said no one is in a position to launch ahead of us, but declined to elaborate further on timing. Now, part of the reason that the SEC may be trying to move up all these delays and announcements is the looming threat of a government shutdown. Indeed, a government shutdown is at this point all but certain to begin on Sunday, after House Republicans failed to come to a suitable agreement during a tense closed-door meeting on Thursday night. The House passed several versions of an appropriations bill that would authorize government spending on Thursday, but reportedly

none have any chance of passing the Senate. The Senate are working on a bipartisan proposal for short-term funding, but this measure is unlikely to be passed by House Republicans. Tensions have flared between House Speaker Kevin McCarthy and House Freedom Caucus member Matt Gates, who is playing a major role in pushing the government into a shutdown. The dispute is around demands to slash government spending with a more specific demand that war efforts in Ukraine are defunded. Now, a government shutdown would end all funding of non-essential government programs until an appropriations bill can be passed. The length of a shutdown would be unknown. However, most government agencies are making plans to shutter for multiple weeks, if not, well into November. The impact of a shutdown will be

largely felt by government workers who will not receive paychecks, as well as the recipients of government benefits. Social Security and Medicare continue to operate as usual during a shutdown, but the patchwork of other social programs will be paused. Now, when it comes to the macro environment, one of the other implications is that a shutdown would halt the collection of economic data. The next Fed meeting isn't until the end of October, but if the shutdown stretches out for a substantial period, the Fed could be faced with making a decision without key economic reports gauging inflation, employment, and growth. That would, of course, leave the Fed flying blind as they attempt to bring the economy in for a soft landing. Ratings agency Moody's have said a shutdown would be,

quote, credit negative for U.S. government debt, and you'll remember that following the debt-sealing crisis, rival ratings agency Fitch downgraded U.S. sovereign debt from AAA to AA plus. Their reasoning was less about the risk of outright default and more about the decay of good governance in the U.S. under increasing polarization. Moody's echoed these sentiments on Monday stating that, quote, while government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of U.S. institutional and governance strength relative to other AAA-rated sovereigns that we have highlighted in recent years. They said that they would potentially look towards a downgrade at some point, and this is notable

because Moody's is currently the loan ratings agencies out of the three major firms that has maintained a AAA rating for U.S. sovereign debt. What's more, Mark Zandi, the chief economist of Moody's analytics, warned that a lengthy shutdown could be enough to tip the U.S. into a recession. I think if it's a two, three-week shutdown, it's a nuisance for some, but not a significant problem for most. If it goes on for more than a month or longer, that may be a headwind that blows so hard it pushes the economy over. Now, while the broader economic impacts are obviously far more important

than how a shutdown would affect the crypto industry, there are a few interesting notes on that front. The major government agency that is currently interfacing with the crypto world is, of course, as we learn from the beginning of this show, the SEC. Under a shutdown, the SEC have stated that they expect to run a skeleton crew at bare minimum functionality. That likely means enforcement actions and investigations will be put to one side, SEC lawsuits likely won't progress, and that could impact any appeal in the Ripple decision as well as attempts to rush the Coinbase lawsuit into this year's Supreme Court schedule. Now, as for Congress itself, it will likely be entirely focused on resolving the shutdown, so we'll of course have little time to work

on moving any crypto legislation out there. Federal courts reportedly have enough leftover funding to continue operating in some capacity, but it's unclear whether some of the crypto bankruptcies that are reaching critical points will be able to progress past the next week or two. Of course, the most high-profile crypto lawsuit is the imminent trial of Sam Bank been freed on criminal fraud charges. Criminal trials typically progress as normal during shutdowns due to constitutional rights to fair proceedings, so no delay is anticipated in that case. That trial is set to begin on Tuesday with a jury selection before the DOJ begins presenting their case on Wednesday. Now, moving on to an update from a story that we've been covering

over the past couple weeks, Ripple has backed out of the deal to acquire crypto-custodian Fortress Trust. The deal was originally announced in early September the day after Fortress disclosed a security breach at a third-party software vendor. They said at the time that customer accounts were fully restored and that there was no loss of funds, but as the story developed, Fortress revealed that they had lost between 12 and 15 million in crypto assets during the attack. Ripple then confirmed that they had backstopped the loss as part of the deal. A spokesperson for Ripple said that the firm was, quote, in a position to act quickly to step in and make customers whole. They said negotiations predated the security incident, but were accelerated after the loss of funds. The deal was only in

principle pending regulatory approval and due diligence. However, on Thursday, Ripple's CEO Brad Garlinghouse announced on Twitter that, quote, a few weeks ago, we signed a letter of intent to acquire Fortress Trust. We've since made the decision not to move forward with an outright acquisition, though Ripple will remain an investor in Fortress. The Fortress team is incredibly talented and has built products solving real customer problems. While this outcome is different from what was originally planned, we'll continue to support them and hope to work together in the future. Fortress CEO Scott Purcell said that the cancellation of the deal was, quote, not a big deal. He said they are an investor and fortress and a great partner. Nothing changes there. However,

anyone even paying a little bit of attention will notice that the deal cancellation echoes similar events surrounding rival crypto-custodian Prime Trust. In June, Bickgo walked away from a deal to acquire Prime Trust after completing their due diligence on the acquisition. In the following months, Prime Trust was put into receivership and then bankruptcy by the local regulator. As part of that legal process, it was disclosed that Prime Trust had a roughly $83 million hole in their balance sheet. A security incident involving wallet management was also disclosed. Scott Purcell was also the CEO of Prime Trust before parting ways in January 2021. And while it's not known whether the shortfall at Prime Trust developed under Purcell's

management or after his departure, there have been plenty of folks pointing out that it's kind of crazy that the same team involved with these two different companies had acquisitions go south after due diligence revealed perhaps less publicly known things. Now, moving back to the present, Ripple walking away from the deal leaves an open question of how that loss will be replaced. It also puts Fortress clients in a difficult position. Swan Bitcoin, for example, is known to be one of the most high-profile clients of Fortress. Following the security incident disclosed in September, Swan said, client coins are in insured cold wallets at Bitco and did not move during the reported incident at Fortress.

The coins are protected by video calls and physical access and are not subject to any incidents at Fortress. Swan CEO, Corey Clipsden, reconfirmed this status yesterday, saying nothing changed, coins with Bitco, as before. For Swan, Fortress primarily functioned, as a legal custodian with physical custody outsourced to BitGo. Two weeks ago, Swan announced a new joint venture with Bitco to spin off a different Bitcoin-only regulated custodian. However, these plans will take between six and 12 months to complete. Part of the issue for Swan is a lack of viable alternatives to Fortress. There are sparingly few regulated Bitcoin custodians in the U.S. At this time, neither Fortress nor Ripple have provided additional statements about why the deal

fell apart. About the best information we have, which is very weak, comes from Pleditor on Twitter who writes, sources tell me that Ripple's backstop of customer funds to Fortress was, quote, structured as a loan, and that, quote, the money already sent before the announcement of intention to acquire. The presumption is that there is no balance sheet hole, unknown the terms of that loan. Not a great situation for Fortress, but better than the worst case scenario of Fortress walking around with a hole in customer funds. Lastly, today, a late breaking story. After being very in the wind since the firm failed last year, Three Arrow's co-founder, Suzu, has now been detained in Singapore and is facing at least four months in prison. Apparently, Sue was arrested

at the airport trying to leave Singapore earlier today. From Bloomberg, quote, Tenio, which was liquidating the defunct firm's estate, said it received a committal order after Zhu after he failed to comply with an earlier Singapore court order compelling him to cooperate with the liquidation investigation. The order sentenced Zhu to four months in prison, according to a statement by Tenio. Now, co-founder Kyle Davies received the same sentence but has not been located. At this time, there hasn't been anyone who has responded to any request for comment from any of these publications. But once again, according to Bloomberg, quote, Tenio says they will seek to engage with Zhu on matters relating to three arrows and recovering lost funds while he is in

prison. Tweet Zack Vol, in less than two months, SBF in jail, Bit Boy in jail, Suu in jail, Trayvon James in jail. Now can we run it back, Turbo? And with a slightly more forward-looking take, Mark Zeller writes, in real Defi, Suu wouldn't have been able to pull off any of his stunts. His arrest is a win, but let's focus on educating ourselves as an ecosystem to shut the door on profiles like him from the start. Until next time, guys, be safe and take care of each other. Peace.