The Breakdown - Grayscale Withdraws ETH ETF

Episode Date: May 9, 2024

Major confusion in the cryptosphere as Grayscale withdraws an ETF application that had been widely assumed to be just the means to an end of another lawsuit. Plus Gensler's softball interview on CNBC. Today's Show Brought To You By Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet 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 Wednesday, May 8th, and today we are talking about Grayscale withdrawing their Ethereum ETF application. 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 on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod.

Hello friends. Well, if you have been on Twitter or LinkedIn, you might have noticed a big announcement. TLDR, the breakdown is moving over into the world of Blockworks. Yes, Blockworks have acquired basically the entire crypto part of the Breakdown Network. That means this show, the associated YouTube channel, Twitter accounts, etc., are all moving over into the Blockworks family, as is Bitcoin Builders, which will have some announcements about reboots on that coming soon. And for me, I've known the Blockworks guys for a really long time. We've always had sort of an ongoing conversation about ways to potentially collaborate. And especially recently, I've really wanted the breakdown to be in a house where there was even more energy and excitement being poured

into growing it and developing it and thinking about new extensions of it. And Blockworks is just a perfect place for that to happen. Now, this deal did not include the AI breakdown. That remains independent, although now repped by Eric Torrenberg's Turpentine, and renamed the AI Daily Brief. And importantly, when it comes to what you can expect from the show, it's basically more of the same but better. I'm continuing to host. There's no plans to change that. There's just a lot more context now to explore some exciting new ways to come at the show. So that's the announcement. Like I said, for you guys who are just listening, shouldn't be too much different. But with that, let's get into today's show. Starting with the news that Grayscale has voluntarily withdrawn their Ethereum

Futures ETF application. After the Bitcoin ETF was approved, basically all speculation in the crypto industry turned to whether we would get a similar approval for Ethereum. On the one hand, it seemed like the reason that the SEC had been forced, more or less, to approve the Bitcoin ETF, which was sort of that their basis for denying it in the past was null and void thanks to court decisions, seemed to many like it would apply in the Ethereum case as well. Effectively, if the SEC had already approved futures ETFs for a product, which they had in the case of both Bitcoin and Ethereum, they kind of seemed bound to do the same thing for a spot ETF. At the same time, though, there has been no indication that this is where the SEC would actually land. One of the things

that happened in the lead-up to the Bitcoin ETF, was a ton of engagement from the SEC to get all the applications finalized in where they wanted to be. We've seen none of that type of engagement when it comes to Ethereum. And now with Grayscale withdrawing, we have some evidence going in the opposite direction. The withdrawal comes just three weeks until the SEC would have been forced to make a final decision on the product. However, more relevantly, on May 23rd, the SEC will be required to decide whether VanX application for a spot Ethereum ETF is successful, in so doing, likely deciding the fate of the entire batch of similar products. This grayscale futures ETF was viewed as a key part of potential litigation to follow if the spot Ethereum ETFs are

denied. It was filed under different legislation to the futures ETFs which are currently trading, likely to make the application more similar to spot applications. All of this makes the voluntary withdrawal a little strange. The SEC will often ask an asset manager to withdraw if a product will not be approved in order to avoid the final decision being recorded. This move is sometimes done simply to allow the SEC more time to come to a decision, with the asset manager refiling with assurance of a delayed approval. However, the entire industry was expecting Grayscale to go the distance on this application, thus forcing a decision from the SEC. Bloomberg ETF analyst James Safart tweeted, This is interesting. Grayscale just withdrew their 19B4 filing for an Ethereum futures ETF.

This was essentially a Trojan horse filing in my view, in order to create the same circumstances that allowed Grayscale to win the GBT lawsuit. Approved futures deny spot. I don't know why they'd do this honestly. In my mind, might as well make the SEC right to do the up an approval or denial of an Heath Futures ETF and go from there. Maybe the SEC spoke with Grayscale about this and whatever was said, convinced Grayscale to withdraw, question mark. Fox business journalist Eleanor Territ noted that Grayscale had never filed the accompanying S-1, so the application was incomplete. Most of the commentary, though, was just deeply confused about what this withdrawal means. Nate Garassie, the president of the ETF store, tweeted.

Getting an SEC ruling on this filing could have been a linchpin in any lawsuit brought regarding spot ether ETF denial. Not sure how to read this. Only reason I would do this if I were Grayscale is because I have assurances spot ETH-E-TF will be approved at some point. And I don't think the SEC is in the business of offering assurances around anything crypto-related. Baffling. Finance lawyer, Scott Johnson wrote, uh, Grayscale, do you mind elaborating? For background, Grayscale filed this ETF application essentially for the sole purpose of getting the SEC on record with respect to its analysis on futures-based ETHs. We don't have that from the current crop of ETHETFs that went live lost October. It was also this order that was critical to the lawsuit filed in the original Grayscale case,

where the court looked at approved Bitcoin futures ETFs and required like must be treated alike for the purpose of spot ETFs. This order is an important part of the mosaic that the SEC was going to be forced to maneuver through as we approached the ETH spot ETF deadlines coming up this month. I don't understand the withdrawal here. Could be several reasons for it, but won't speculate until hopefully Grayscale says something publicly. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your big. Bitcoin custody best practices, and of course, to help all the new folks do the same.

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Usually when we have a story in the crypto space, even if we don't have a full explanation, there pretty quickly becomes some explanation that makes more sense than others. In this case, though, just no one has any real idea why this would have been. It might become extremely clear when it all plays out, but for now it's a bit of a head scratcher. What's not a head scratcher is just what Gary Gensler thinks about the crypto space. With news that Robin Hood had received a well's notice still echoing throughout the industry, SEC chair Gary Gensler wasted no time getting in front of the cameras. Gensler appeared on CNBC's squawk box to once again discuss his agency's regulatory stance. He was asked why the SEC is focusing so many resources on the relatively tiny

crypto markets. He responded, we oversee a $110 trillion dollar capital markets. Crypto is a small piece of our overall markets, but it's an outsized piece of the scams and frauds and problems in our markets. He repeated his claim that much of the industry is non-compliant with securities regulations, adding, so you end up with an outsized ratio of journalist questions and cryptojournalist to market cap. And this appeared to be the main point that Gensler had come in to say, stating that every time he's on squawk, he gets asked about crypto. Gensler seemed to be claiming that the SEC is only focusing on crypto because of the outsized media attention it attracts. Turning to the Robin Hood-Hood-Wells notice, Gensler said the SEC has a very important job.

Quote, ensuring that people who are asking you to buy and sell securities are following the law, so that you get disclosures in certain protections. This was another big theme of the interview that crypto tokens don't provide the same disclosures as stocks. Gensler claimed, Stepping back from it, the field of crypto assets, without prejudging any one of them, many of these tokens are securities under the law of the land, as interpreted by the U.S. Supreme Court. So we follow the law and you, the investors are not getting the required or needed disclosures

about those assets. Notably absent from the interview was the fact that Gensler's SEC has failed to create a crypto disclosure regime, such as, for example, the safe harbor provisions championed by Commissioner Hester Perce. Gensler was asked straight up whether Ethereum is a security, which was characterized as the fundamental question facing the industry given the rapidly approaching ETF decision. Surprising no one, he dodged the question, instead saying, to me, the fundamental question is how do we ensure that the American investor is protected? Right now, they're not getting the needed or required disclosures. And the intermediaries in the

center of this rather centralized market generally are conflicted, and doing things we would never allow the New York Stock Exchange to do. The New York Stock Exchange is not allowed to trade against investors. Obviously, many in the crypto industry saw this as a bizarre example to choose, given that that allegation hasn't been made against any U.S.-based exchanges other than Binance U.S. In fact, it further confirmed for people that Gensler and his SEC at this point just believed that all crypto exchanges are, for all intents and purposes, illegal. Recent allegations from Patrick McHenry were put to Gensler, claiming that he misled Congress about the SEC's view on whether Ethereum is a security. The revelation had been that the

SEC was secretly investigating this issue, at the same time as Gensler avoided taking a public stance during a congressional hearing. Gensler said, We speak to Congress directly and share with them accurately what we're doing. We don't speak publicly about whether we have an investigation or whether we don't have an investigation. Two things I think stand out about this interview. First, this is representative of the message the public is receiving about crypto at the moment. Although Bitcoin is back up near all-time highs, public perception of the asset class remains

at what feels like all-time lows. Earlier this week, Ohio State's commencement speaker was loudly booed for asking the crowd to keep an open mind about Bitcoin. Crypto Twitter user Not So Fast wrote, appreciate the looks outside our CT bubble into the normie apprehension about crypto. Hardly anyone is bullish outside our sphere. The numbers going up aren't going to drag their narrative into a swift 180. Basically, as the last cycle ramped up, you'd often hear people say it was too late to invest in Bitcoin.

Now, however, the vast majority of CNBC viewers are just nodding along as Gensler calls the entire industry a scam. A second point, frankly, is just how cozy Gensler's media circuit has become. This interview was basically just Andrew Ross Sork in allowing Gensler to address basic critiques. Indeed, after pushing back hard in previous Gensler interviews, CNBC appeared to bench Bitcoin or Joe Kernan. I think it's fair to say that while Gensler isn't exactly known for facing up to tough media scrutiny, this is fairly close to his most softball interview to date.

Meanwhile, with the SEC's crypto enforcement ramping back up, the House Financial Services Committee decided to take a closer look at a hearing entitled SEC enforcement, balancing deterrence with due process. At this stage in the political cycle, the two parties have ossified their views. Democrat leader Maxine Waters said in her opening, the crypto industry, which publicly claims to want regulation, is suing the SEC for trying to regulate it, despite the fact that the courts agree that the laws on the books are applicable. Crypto can't have it both ways. We need strong protections, not deregulation.

My message to the crypto industry and everyone else, Democrats will always press for compliance, investor protection, and market integrity. Republicans chose to focus their time around two major issues. The debt box scandal and SEC accounting guidance that prevents banks from providing crypto custody. On the debt box topic, Ann Wagner said, public trust in the SEC will only decline when its employees are sanctioned and forced to resign for their gross abuse of power, as they were in the recent case against the crypto platform known as debt box. These actions are extremely concerning to members of this committee, who recognize that cases should never be handled in such an unethical and unprofessional manner.

Democrat crypto antagonist Brad Sherman took the other side of that argument, essentially claiming that this was a few rogue employees rather than an agency-wide problem, and also put his stamp on the ends justifies the mean argument here. Then, on the accounting guidance known as SAB-121 or SAB-121, Republican Mike Flood said, It's unfortunate that the SEC would attempt to circumvent the rulemaking process while falsely claiming that Saab-121 is simply non-binding staff-level guidance. Waters, meanwhile, argued that attempts to kill SAB-121 were unnecessary and prevented the SEC from carrying out its duties.

So, basically, much of the hearing was along these lines, with representatives on each side just simply digging into their existing position on crypto. No current SEC staff were presented to speak for the agency, but the hearing did feature former SEC investigator turned rabid cryptocritic John Reed Stark. He presented the opinion that regulation by enforcement is the correct approach. Now, aside from the soundbites and the posturing, the most important outcome of the hearing was a pair of legislative proposals. On the accounting guidance, the House will vote on Mike Flood's resolution to rescind SAB 121 later this week. Democrat Sean Kasten also introduced a new bill that he claimed would clamp

down on mixers, his words. Kasten said that unless sufficient audit work shows otherwise, quote, the presumption should be that these are money laundering channels. Let's go through and get that cleaned up and fixed. While half a dozen crypto mixers have been shut down over recent years using the current laws, this bill would take things a step further, functioning as a two-year ban on mixers while studies are carried out. It would achieve this by prohibiting registered crypto services from accepting mixed funds. Sherman, who is a co-sponsor of the bill, made the intentions clear, stating, this legislation is a vital first step in banning the use of crypto mixers in the United States. And boy, how much did he want to drop the word mixers from that statement.

Anyway, the hearing was a bit of a nothing burger, just a lot of job owning and positioning, and I continue to think that not very much is going to happen in the immediate term when it comes to crypto politics. However, wrapping up here, a new poll suggests that crypto policy could be a key issue in battleground states during the upcoming election. The survey was conducted by Digital Currency Group in the Harris poll, taking opinions from around 1,200 registered voters across Michigan, Ohio, Montana, Pennsylvania, Nevada, and Arizona. Half said they pay attention to candidates' crypto policy, while more than 20% said they consider crypto to be a major election issue. The question was framed by asking survey respondents if they wanted elected officials to

focus on regulating crypto and protections for investors. Blockchain Association's CEO Kristen Smith said, digital assets have emerged as a significant issue in the upcoming election. Additionally, over one quarter, 26% of voters indicate that they are actively weighing political candidates' positions on digital assets when making their decisions. This data underscored the increasing relevance of our issues in shaping the electoral landscape of 2024. Interestingly, the survey found no major correlation between household income or political affiliation in the answers, suggesting that crypto is an issue that crosses societal divides. Around 14% of respondents currently own crypto, while a further 12% have previously owned crypto. Out of the state's surveyed,

Ohio was easily the most negative, with 77% of Ohio voters answering that they were more negative towards crypto. That's important, of course, because Senate Banking Committee, Chairman Sherrod Brown, faces a tight race in that state and has been one of our big antagonists in terms of getting policy done in the past. Still super interesting to see crypto emerging as an actual issue, something we will keep a close eye on for sure. However, that is going to do it for today. day's breakdown. Big thank you to my sponsor for today's show. Check out the Ledger Bitcoin Orange Nano. 5% of sales will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.