The Breakdown - SHOCKER: Is the SEC About to 180 and Approve ETH ETFs?

Episode Date: May 22, 2024

Only Tuesday and already one of the most consequential political weeks in crypto history. NLW covers the latest on ETH ETF approvals, FIT21 Act and more. 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 Tuesday, May 21st, and today, boy, do we have follow-ups about crypto's big political week. 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, this week is already arguably the most important week in U.S. Crypto Policy ever, and it's only Tuesday. Yesterday morning, Grayscale CEO Michael Sonnonshine, resigned to be replaced by a veteran

Goldman Sachs executive with rumors the company is being prepped for sale. Promethean, the prototype for so-called SEC compliant crypto, said they are soft launching their Ethereum custody service, and longtime crypto antagonist J.P. Morgan's CEO, Jamie Diamond, said he would be retiring as the head of the world's largest bank within five years. And yet, none of these stories matter anywhere near as much as the paradigm-shifting events that played out yesterday in Washington. Rather than trying to rank the importance of these various things, we're just going to go chronologically throughout the day. In the morning, Senate banking chairman Sherrod Brown issued

a statement calling for a change of leadership at the FDIC. Chairman Marty Groomberg has been under intense scrutiny for several months after reports uncovered widespread misconduct at the agency. Sexual harassment, racism, discrimination, and a culture of bullying were allowed to fester during Greenberg's time his head. On top of all that, there was an implication that the FDIC had allowed this culture to undermine the agency's critical work as a banking supervisor. Grunberg himself was not directly implicated in the worst of it, but the FDIC chair had agreed to undertake anger management courses to correct his leadership style. There were a string of congressional hearings, but prior to Monday, there was a sense that Democrat leadership would just wait for the

scandal to blow over, rather than removing Grooenberg. Brown's statement made it painfully clear that the status quo was no longer tenable. Brown said, I am left with one conclusion. There must be fundamental changes at the FDIC. Those changes begin with new leadership, who must fix the agency's toxic culture and put these women and men who work there and their mission first. Brown called on the president to immediately appoint a new FDIC chair. And by the end of the day, sure enough, Grunberg said that he would step down, with the White House stating that a replacement would be nominated soon. So why would this matter for the crypto industry? Well, it matters because Grunberg was instrumental in weaponizing the banking system against political enemies. He's been a Democrat

fixture at the FDIC for more than a decade. Grunberg served as FDIC chair for six years during the Obama administration and returned in 2022 for the second half of the Biden presidency. During each of these terms, Groomberg was a key architect of the debanking campaigns known as Operation Chokepoint. Under Obama, the FDIC put pressure on banks to remove financial access from gunstores, online gambling companies, and coin dealers amongst the giant list of legal businesses. From 2022 onwards, of course, we know that immense pressure was put on banks to cut the crypto industry off from financial services. Grunberg's exit from the FDIC and a complete leadership rebuild of the agency could signal the beginning of the end of the financial system being weaponized against domestic businesses

that fall out of favor with the administration of the day. That would massively improve the ability to operate a crypto business in the U.S., where simply maintaining a bank account has long been one of the most difficult challenges facing companies of all size. Nick Carter summed it up, we did it, fam, it's over, choke point Marty is done. RIP, Bozo. Still for a less personal analysis, we can turn to Brandon Peterson, a reporter at Punchbowl News, who said, among other things, this is a huge break with Senator Elizabeth Warren, a close brown ally, and fellow progressive who has fought harder than any Senate Democrat to keep Grunberg in his current job. If that was the only story yesterday, it would have been a very big story for us.

But let's continue on throughout the day. Of course, on yesterday's show, we discussed how Democrat leader Maxine Waters will play a pivotal role in the vote on the Fit 21 bill. The bill lays out crypto market structure and regulatory jurisdiction, giving the industry much-needed clarity. Waters faces the decision on how to direct Democrat party voting. She could aggressively whip votes to oppose the bill. She could loosen the reins and endorse House Democrats voting their own opinion. Or she could even flip to supporting the bill. On Monday, Waters convened Democratic lawmakers for a party briefing on the bill. Politico reported it as Waters launches crypto-offensive.

An invite for the briefing said it would explain the, quote, major consequences and spillover effects to the traditional securities market. Speakers at the briefing included American University's Hillary Allen, Duke University's Lee Raynors, Better Mark Dumas, and Americans for Financial Reforms Mark Hayes. That's essentially the list of academics and lobbyists that have been on speed dial to testify against crypto at recent congressional hearings. Masari CEO Ryan Selkis didn't mince words about Allen attending the briefing. He tweeted, Elizabeth Warren has sent her surrogate to the house for one last stand. Maxine Waters don't believe her lies. Work with us and keep innovation in America, not China. Austin Campbell of Zero Knowledge Consulting had also seen enough, adding,

if this is who the senior House Democrats are inviting, they are going to prove that Ryan Selkis is correct to go full frontal assault and will cost Dems the presidency, the Senate, and the chance to take back the House. Politico reporter Eleanor Mueller initially reported that House Democrat leaders would not whip votes against the bill, but that seemed to have changed by the afternoon. The whip questionnaire sent out on Monday morning said that ranking members Maxine Waters and David Scott strongly opposed the bill, but stopped short of making a vote recommendation. Following the briefing, Democrat leaders sent a dear colleague's letter that urged members to vote against the bill. The letter claimed that giving a safe harbor to existing crypto firms while

rules are put in place, quote, weakens investor protections and opens the door to fraud and market manipulation. It framed the bill as a massive deregulation of digital assets because it would force the SEC into formal rulemaking rather than regulation by enforcement. Maxine Waters had scheduled the second briefing to take place today on Tuesday, which was set to feature a presentation from SEC officials. Debate and the vote are currently scheduled on the House agenda for Wednesday. 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.

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Thanks once again to Ledger for supporting the breakdown. Still, maybe the biggest thing happened later in the afternoon. when Bloomberg analyst dropped a bombshell regarding the ETH ETF. Keep in mind that no one, and I mean no one, has thought that this thing was getting approved, specifically because we've seen none of the SEC engagement that we got before the Bitcoin spot ETFs. However, in the early afternoon, Eric Balcunis from Bloomberg tweeted, we are increasing our odds of spot ether ETF approval to 75% up from 25% hearing chatter this afternoon that the SEC could be doing a 180 on this as it's increasingly a political issue. So now everyone is scrambling. Like us,

everyone else assumed they'd be denied. Markets immediately ripped higher on the news, with ETH ending the day up 20%. In U.S. dollar terms, that was the second largest daily increase that ETH had ever seen. Exchanges were reportedly told to revise their 19B4 filings overnight, with a list of comments provided by SEC staff. The agency appears to be scrambling to get everything in line ahead of Thursday's deadline. A little nuance on the timeline for approval now that it appears more likely. The SEC can approve 19B4 filings without approving the accompanying S1 product disclosures at the same time. This could mean that ETH products are delayed for for weeks or even months before they begin trading. Both filings were approved at the same time for the

spot Bitcoin ETFs, but one of the Bitcoin futures products in 2021 was delayed by around five months. The issue of whether the ETFs will be allowed to stake their ETH holdings will likely be a key sticking point between regulators and asset managers. We also know from the reporting that SEC staff only began engaging yesterday, so it seems unlikely that everything is sorted out by Thursday. Many of the ETH true believers said that this was always the inevitable outcome because of mounting political pressure and the SEC lacking a good reason to deny the ETFs. Finance lawyer Scott Johnson made the point that, quote, people telling you this was always going to be approved are immensely underselling what might be happening here. From where I'm sitting, there's no reason to

doubt that the Bloomberg analyst had an accurate read when they said that the SEC was going to deny the ETFs up until yesterday. Bakunas said, from what I'm hearing, this was a total shock to everyone involved. That makes this pivot even more impactful. TLDR, this doesn't look like the SEC making a rational decision based on the strength of their legal arguments. It looks more like a collapse of their political will to hold back crypto products. The bull posting was in full of effect after this all happened. Andrew Kang of Mechanism Capital wrote, Is it possible that an ETH-EETF approval is not just an isolated event, but actually the first step of a complete U-turn in the Democratic Party's policy stance towards crypto?

In that case, you are not bullish enough. Phil Bonello from Plaintex Capital said, if the ETH ETF gets approved, it'll be a bigger signal than the Bitcoin ETF. One, ETH isn't BTC. Bitcoin was viewed as a potential exception and nothing else would get a product. ETH would open the path to a ton of other crypto ETFs. Two, it would signal a major political turning point on crypto. Warren's Worse. on crypto will have lost. Three, allocators were beginning to believe this is a Bitcoin-only cycle. Funny how history rhymes. They will now want exposure to everything. Yesterday morning, Tim Ryan published an op-ed in Newsweek titled, To avoid danger, US must lead on crypto and blockchain. Ryan is a

former Democrat representative. He now works with multiple progressive think tanks as well as serving on the Coinbase Global Advisory Council. The article mirrored what progressive crypto folk had been saying for years, that the technology is fundamentally an equalizer within society and has the potential to drive deeply progressive reform. Ryan wrote, having convinced themselves that various misuses of blockchain obviate its underlying value, Senator Elizabeth Warren and her allies seem more interested in smothering innovation than harnessing its potential for the public benefit. While their concerns are understandable, their approach is fundamentally misguided. The dramatic election season pivot we are witnessing emphasizes that the crypto voting bloc has become too big to ignore. The stand with Crypto

Alliance now has almost 700,000 members that are willing to take this issue to the polls. That number is up by 200,000 over the past week. It seems pretty clear that the administration has seen this voter base gathering and are fairly scared about the implications. The simplest read on yesterday's events is that it represents the final collapse of support for Warren's anti-crypto army. Ryan Shot Adams a bankless wrote, snap. That snap you're hearing is the back of the anti-crypto army being broken. If the Ethereum ETF is approved Thursday, I expected signals a full 180 on the White House attack on crypto. Ceasing bank choke points, reigning in SEC lawsuits, supporting pro-crypto legislation. This is establishment Democrats realizing anti-cryptop policy will lose them an election

and full-blown pivoting. They'll be looking to do crypto voters' favors until November. Now, the biggest question is how deep the collapse of support goes, and whether it's just a cynical election ploy. Some think it's time to press the advantage and extract a political cost. Nick Carter tweeted, the Biden admin is marginally taking their foot off our neck for cheap political points because junior staffers showed them scary internal polls. Don't be placated. We still need a clean house and total regime change. Others assume this is a complete surrender, encourage the industry to give Democrats another chance. Adam Cochran wrote, Schumer and Dems broke with Biden after a veto flex to vote against a bill. Then the head of the FDIC

was pushed to step down. This is not political placating. It's one of two things. A, a rift between the White House and Senate Dems on policy, or B, the White House taking back financial regulation policy out of Warren's court. Warren's messaging hasn't changed, and as of last week, she was supported in executive branch messaging. Somewhere, someone with authority has concluded she has lost the plot and is making the admin look incompetent. But the majority leader doesn't break rank with his party's president on a veto flex over junior analyst numbers. This is a major shift and a critical opportunity for crypto lobbyists to stop being one-sided zealots and build bridges to both sides of the aisle. We should not make the mistake of looking a gift horse in the mouth. As for the broader

implications, it's all there in the markets. Although ETH is up tremendously, crypto tokens are up across the board. Overall market cap rose by more than 8% for the day. This suggests that the crypto industry isn't taking this as just about ETH, but a paradigm shift for the entire industry. So, as I mentioned, coming up tomorrow we have the Fit 21 vote, and that will give us a ton of additional information around really how deep this pivot is. I, for one, am not ready to declare a victory lap yet. I think that the closer to actually winning a political battle one gets, the more likely the losing side is to lash out and use every tool in its toolbox to try to come back. So strap in for what promises to be an exciting week. That's going to do it for today's breakdown. Big thank you,

as always, 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.