The Breakdown - SEC Approves ETH Spot ETF

Episode Date: May 24, 2024

At least, the first stage of the approval has happened. NLW explores the political pressure that caused this to come about. 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 Friday, May 24th, and today we are talking about the approval of the Ethereum Spot ETF. 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. All right, friends, well, rounding out the biggest ever week in crypto policy, the SEC has approved Spot Ethereum ETFs. Kind of. On Thursday afternoon, the Division of Markets and Trading approved 19B4 rule change applications for all eight Ethereum products. There was no announcement regarding the accompanying

S1 product disclosure filing, so those are presumably still being considered. Both sets of filing must be approved before the products can begin trading. This split process was generally expected by most analysts, given how last minute the decision to approve appeared to be. The S1 process is handled by a separate division of the SEC, and revisions to these filings took months back and forth with SEC staff in the lead-up to the launch of Bitcoin ETFs, even though they were ready at the same time as the 19B4 approvals. There is some sense that SEC staff have already cleared up most of the thornyer issues during the Bitcoin revisions, so it might not take as long this time around. However, by all accounts SEC staff were completely blindsided by the approval, so have only just

started to work on S-1 revisions. Bloomberg ETF analyst James Safart said to expect the final sign-off to take, quote, a couple weeks but could take longer. Typically, this process takes months, like up to five months in some examples, but we think this will be at least somewhat accelerated. Bitcoin ETFs were at least 90 days. We will know more soon. Even if the S-1s were approved next week, asset managers haven't had anywhere near enough time to set up all the back-end infrastructure like custody and market-making. The approval itself was deeply strange, just like everything related to crypto we've seen out of this SEC. Usually SEC announcements are ready to go towards the end of the trading day, but this one wasn't released until 5 p.m. When the Bitcoin ETFs were approved, we got a wealth of

information and commentary on how the SEC was thinking about the products. Most commissioners released a long statement on the reasons behind their vote. This approval was comparatively sparse. The products were approved without a vote from the commission, so we didn't even get to see which Democrat commissioners waived the products through. Instead, the products were approved using the delegated authority of SEC staff. Safehart noted that this is completely ordinary. tweeting, making decisions via delegated authority is the norm. This is how things are typically done. If the SEC required an official vote for every decision or every document, it would be insane. It would have been nice to see where the political lines were drawn, though.

Eleanor Territ of Fox Business noted that Democrat Commissioner Crenshaw is currently out on maternity leave, which could have made a vote impractical. The more conspiratorial explanation is that Democrat commissioners did not want to go on the record with a public vote on the issue. As Nate Garassi, the president of the ETF store tweeted, zero statements from SEC commissioners on spot-Eth ETH ETFs. Silence speaks volumes. As for the functional parts of the approval notice, there were a few interesting points. The SEC accepted analysis from Bitwise, which showed that ETH spot and futures markets are

tightly correlated. This suggests that a few years of regulated futures trading data will be enough to launch the next crypto-etif. The products were approved under the commodity-based trust shares rule, which hopefully closes the door on any thought that the SEC will continue attempts to label Ethereum as a security. There have now been multiple junctures where the SEC could have made decisions that contradicted that claim. Bringing an enforcement action now would have serious issues with fair notice and due process requirements. These products don't include staking, so we're not entirely out of

the woods on whether staking as a service is subject to securities law, but the underlying token is now wildly unlikely to be considered a security moving forward. Crypto lawyers latched on to this point, with Coinbase Chief Legal Officer Paul Grewell tweeting, this week, this day has been a roller coaster, unlike any other I've seen. ETH is effectively deemed a commodity as we've always known it to be. Miles Jennings General Counsel at A16Z added, these approvals enshrine the SEC's position in 2018, ETH is not a security. That means the SEC has formally recognized that decentralization moves tokens outside of the U.S. securities law regime. With that Beachhead established, all projects now have a path forward. And indeed, there's a lot

of speculation about which crypto asset will be the next to get an ETF, from crypto Twitter all the way to CNBC. So far, the SEC has only approved crypto ETFs on the basis that they are highly correlated with a regulated market of significant size. That test has only ever been satisfied by registered futures trading on the CME, which only hosts market for Bitcoin and Ethereum. The SEC has also wanted to see multiple years of trading data before approving a new product. That doesn't mean this can't change. The SEC could relax their rules or new regulated markets could spring up, but for now, under the current logic, it doesn't seem likely that we'll get a Solana or Dogecoin ETF for several years. However, this approval does mean that there's now a pathway for assets beyond Bitcoin

to be listed as spot ETFs in due course. That in itself is a pretty optimistic change for the industry and a good reason to enjoy thinking about what could come next. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto. Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary operating system, but also brings ease of use. This makes Ledger a safe and secure way

to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin Development. Thanks once again to Ledger for supporting the breakdown. Aside from the optimism, there were many who remarked on how this last-minute U-turn left the SEC process in complete shambles. AP Abacus, a crypto rumor aggregator, published some anonymous text messages from someone in contact with SEC staff. That person wrote, I just talked to one who described this administration as a bunch of clowns, complete operational disaster. No one is ready, no one has been spending time on it. While there's a certain amount of

satisfaction to take from watching the Gensler doctrine collapse in a very publicly embarrassing way, this also underscores why it's so dangerous to politicize what should be a merit-neutral regulator. A bunch of SEC staff are now going to have to work nights and weekends to fast-track this process for the second time in six months, which is not really good conditions to do this sort of work in. The market has been anything but fair, orderly, and efficient surrounding these products and direct contradiction to the SEC's mission statement. Frankly, none of this was necessary but for Gensers' desire to use capital market regulation to achieve a political agenda. It simply didn't need to be this way. Consensus who are just beginning their lawsuit against the SEC

wrote, while consensus welcomes today's decision to approve ETH-Spot ETS as a step in the right direction, this seemingly last-minute approval is yet another example of the SEC's troublesome ad hoc approach to digital assets. No other industry, market or asset is subject to such deliberate regulatory abuse. It is unfair to market participants, antithetical to the rule of law and handcuffing innovation. Today's approval signals that the SEC views that ETH is a commodity and not a security, contrary to the position it continued to take prior to the events of this week, as described in our recent lawsuit against the SEC. We will continue to fight for definitive regulatory clarity in our case, and we are pleased to see

the tremendous bipartisan congressional efforts seeking to provide clear and sensible regulation. For many, the biggest takeaway was just how remarkable the turnaround from the SEC is. In the space of just a few days, the idea of regulating the crypto industry out of existence has crumbled. Investor Adam Cochran wrote, The most important thing here isn't the ETF. It's total change in stance by administration that forces Gensler to concede. It's, ETH is a commodity, even with its current attributes. That means we can extrapolate a lot of other projects what elements matter in securities law.

Today, a lot of things probably clearly became commodities, even if they don't know it yet. Jake Trevinsky, the chief legal officer at Variant Fund tweeted, the ETH ETF approval is short. The future spot correlation data is very strong, as he basically said, our hands are tied. No direct mention of ETH's non-security status, but it's clear. Commodity-based trust shares. Explicitly avoid staking, fight for another day. Great week.

They could go slow on the S-1s, but I don't think they can drag it out forever. I think this is just what winning is like. All in its own, this would have been a great capstone to this week, but it wasn't the only big political thing that happened. After Wednesday's Blockbuster House vote on the Fit 21 Act, another important vote that was held yesterday went a little under the radar. The House voted in favor of Tom Emmer's CBDC Anti-surveillance State Act. That vote fell mostly along party lines,

with only three Democrats voting in favor of the bill. Emmer has been working on this bill since 2020, aiming to prevent a CBDC from being issued in the United States if it doesn't respect the financial privacy of citizens. On the House floor, Emmer explained, the bill is simple. It halts the efforts of this administrative state from issuing a financial surveillance tool that, if not done correctly, will fundamentally alter the lives of every American. Emmer argued that a CBDC would, quote, give the government the ability to surveil and restrict Americans' transactions and monitor

every aspect of their daily lives. Emmer gave the examples of the Chinese digital currency and the asset seizure used against Canadian truckers to demonstrate that his view of the danger is not hyperbole. He said, it is naive to believe that your government won't weaponize the tools it has to control you. Functionally, the bill requires congressional authorization to issue a CBDC and holds that any digital currency issued by the government must be open, permissionless, and private. So what next for this bill? Well, similar to the Fit 21 bill, this legislation probably won't make it very far in the Democrat-controlled Senate. Instead, it acts as a position statement for the GOP heading into the election.

Emmer's bill began as a relatively niche concern that has snowballed into a major policy issue heading into the election. The entire week, we've been discussing how this is going to be the biggest week in crypto policy history and boy, did it live up to that billing. We had, just to recap. Operation chokepoint architect Marty Groomberg stepped down at the FDIC, 71 House Democrats breaking ranks with the administration to pass Fit 21, and of course, the SEC capitulating entirely to approve the ETHETF. In a single week, we've seen the Democrats' anti-crypto agenda fall away entirely. Elizabeth Warren's anti-crypto army looks diminished in power, if not entirely defeated. This confluence of events can really be traced back to two

major turning points over the last month. First, the DCG Harris poll showing that one in five voters in battleground states considered crypto to be a key election issue. While the amount of crypto-focused polling has been slowly ramping up over the past year, this one really seemed to strike a chord. President Biden is currently facing defeat in each of the battleground states featured in that polling, and that seems to be having an effect. The administration had gone all in on the idea that after the collapse of FTX, crypto would fade away. That political calculation could not have been more wrong. In a tight race, it now looks like there are enough crypto voters to swing the election. Whether or not that's actually true largely doesn't matter as much as whether it's plausible.

Until the Harris poll, the idea that Biden might lose the White House because of crypto was largely unthinkable. The second big catalyst, of course, was Donald Trump loudly declaring, if you're in favor of crypto, you better vote for Trump. Nick Tamano of one confirmation tweeted, Trump said he's pro-crypto and saw an influx of support. Days later, Democrats passed a pro-crypto bill and approved the ETH ETF. The vision has always been that politicians would come around to crypto when it became undeniable. It's what the masses want, and their jobs were at stake. The politicians and regulators know what time it is. When it comes to what to watch next, one of the big questions is how deep the Democrats pivot runs. We've now seen Senate leader, Chuck Schumer, House powerbroker, Nancy Pelosi, and a long

list of congressional leaders cross the Florida vote in favor of crypto bills. This is either a genuine change of course, from a party that found itself detached from public sentiment about crypto, or an emergency election-saving operation. At this stage, it's very difficult to tell which one it is. But having senior congressional figures vote against administration policy is not a normal thing to happen, and you have to assume that carries a lot of weight. Whatever the case, crypto is now undeniably on the political map as a powerful and distinct voting block. It's well-funded, it's politically engaged, and it matters. Crypto might be a marginal industry, but elections are won and lost on the margins. We've spent most of the last two years deep in and then they

fight you, but this week, all of a sudden, we're getting a glimpse of and then you win. That's going to do it for today's breakdown. Hope you guys are getting ready for a wonderful Memorial weekend or the equivalent around the world. One more big thank you to my sponsor for today's show. Check out the Ledger Bitcoin Orange Nano. Five percent of sales will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.