The Breakdown - The Last Details Before Bitcoin Spot ETF Approval

Episode Date: January 6, 2024

NLW covers the last details as the crypto industry gets hyped for an anticipated ETF approval. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown 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, January 5th, and we are catching up on all of the news this week. So much going on. Lots of little stories as we get very, very hyped for the 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. So friends, like I said, today we have a serious grab bag of topics. We are going to be

ripping through many of them. And where we start is, of course, with the ETF. With Bitcoin spot ETF approval is expected any day now, sources that the hopeful applicants ran through their to-do list with reporters from the block. Grayscale is working on an updated 19-4B rulemaking filing, which needs to be submitted by Tuesday. This isn't necessary as their current paperwork was filed months ago and needs a refresh. All issuers will also need to file their finalized S1 prospectus filings. Some of these product disclosures currently omit fees and the names of authorized participants in charge of market making for the products. On the SEC side, both types of filings will need to be approved. These approvals won't necessarily come at the same time,

with Bloomberg analysts anticipating a short delay between 194B and S1 approvals. A source at one issuer said, the morning after both are true, trading will start. Now, one source expected that trading will go live on Thursday or Friday of next week. Another source said there was some uncertainty, as most applicants don't have deadlines until March. Bloomberg Senior ETF analyst Eric Belcuna said in a Thursday Twitter post, SEC is giving final comments as we speak. Then issuers will submit final 19B4s and S1 soon after. So I mean this is definitely as close to done as we've been, but no official approval as far as I know. This was in response to a cryptic post from Skybridge capital founder Anthony Scaramucci, which simply stated, it's done. A spokesperson for the

SEC told the block, we don't comment on individual filings. Broadly speaking, if the commission declares a registration statement effective, that is reflected on Edgar. 19B4 orders will be posted on our website and then published in the Federal Register. This could imply that a vote from the commissioners would be published as soon as possible rather than being withheld. Now, over the last few months, asset managers have been working with the SEC to deal with concerns around the products. These have broadly surrounded three issues. Firstly, the SEC did not want market makers dealing with Bitcoin directly. This meant that all issuers have gone with a cash-only share creation and redemption mechanism. A source told the block, the SEC told everyone if you want to be in

the first wave, you have to be cash-only. Greyscale was reportedly the longest holdout. A source from the firm said they told the SEC during a meeting that, quote, In the 30-year history of the U.S. ETP marketplace, all-spot commodity ETPs have employed in-kind-only primary market transactions. Caution should be exercised before breaking with this convention for the first time as it relates to the approval of spot Bitcoin ETPs. Secondly, the regulator wanted to know which market-making firms would be named as authorized participants.

Asset managers have now named major Wall Street firms including J.P. Morgan, Jane Street, and Cantor Fitzgerald as their APs. Naming APs ahead of time isn't typically required, but this time the SEC insisted, according to a source. Finally, the SEC wanted to know how asset managers plan to handle air drops and hard forks. Although a major Bitcoin fork hasn't occurred since 2017, the SEC reportedly wanted to ensure procedures were declared just in case. According to a source, issuers eventually agreed that they would relinquish any entitlements to a hard fork that diverges from the main chain. Now, with all of this, some are still warning that nothing is certain when it comes to the SEC.

James Angel, an associate professor at Georgetown University, said, the SEC has a number of ways they can slow things down even more. They can basically go to the issuer and say, if you want the answer today, it's no. What we want to do is withdraw your application and refile it to start the clock again, and here is what we want you to do. Although the deadlines are there, the SEC has plenty of ability to coerce the registrants to voluntarily agree to a delay. Anything can happen. Angel did note that asset managers would invariably go to court over a delay, but the legal process could take months. Still, by and large, the industry's sense is that this is happening.

Jake Chavinsky, the chief legal officer at Variant Fund, wrote, It took over 10 years, but we're finally on the verge of having Bitcoin spot ETFs approved in the U.S. Yes, we are. Many deserve credit for this milestone, but chiefly Grayscale and its lawyers who had the guts to fight this out in court and won. Let's fight more in 2024. Ryan Selkis, the CEO of Masari, said, The thing people are missing about the Bitcoin ETF is that it's a cross-the-rubicon moment. Crypto will have a long-awaited wedge into mainstream global finance.

That won't unhappen. Mass-crypto adoption is inevitable with this step. It's just a question of time horizon. Now, of course, with the long battle over Bitcoin ETF's seemingly coming to a close, attention will inevitably turn to other cryptocurrencies which could be next in line. Analysts are focused on ETH as the likely candidate to be granted the next-spot-Crypto ETF. Bloomberg ETF analyst James Safart said during a seminar this week,

The CFTC is blatantly calling Ethereum a commodity. They do not call them securities. The SEC has approved Ethereum futures ETFs. So again, Gary Gensler will not explicitly say whether Ethereum is a security or a commodity, but in their action by approving those Ethereum futures ETFs, they're implicitly accepting those Ethereum futures as commodities futures. It wouldn't just be the SEC going against the crypto industry. If they call Ethereum a security, it'll be going against their sister regulator, the CFTC. That's why I think we could see a potential Ethereum approved this year as well. DC investor agrees, tweeting,

once the Bitcoin ETF hits, literally everyone in the newly emergent TradFi crypto sector will be looking at the fact that only one other asset has CME futures. A live futures ETF has been referred to in the past as a commodity by the CFTC and prior SEC chairs. It's ETH. Now, there are already a number of spot Ethereum

ETFs waiting in the wings, including products from Arc and Grayscale. When Grayscale filed their application in October, analysts suggested they might be looking to engage in the same legal battle with the SEC over an ETH-EETF that they had done with their Bitcoin product. This point was picked up by a high-ranking executive speaking with Block this week. They noted that Bitcoin ETFs were being approved due to very specific legal arguments based on prior reasoning for denials provided by the SEC. More specifically, the SEC had lost

the Grayscale case because they couldn't support their claim that spot Bitcoin markets were at risk of market manipulation, while futures markets were not. The SEC was backed into a corner where they were functionally required to approve spot Bitcoin ETFs. With spot Ethereum ETFs, the SEC is yet to deny any funds. This will allow them to construct a more legally defensible reason to refuse the funds should they choose to do so. Now, when it comes to expectations, obviously everyone in our little crypto corner of the world is totally convinced that this is happening.

However, Bitwise have released the latest edition of their financial advisor survey, which suggests that many will be surprised at Bitcoin ETF's launch next week. 437 financial advisors responded, with only 39% stating that they expect ETFs to be approved this year. 46% said that they don't expect ETFs to be approved until 2025 or later. A further 12% said they never expect to see Bitcoin ETFs listed. Of the advisors who said they were interested in buying Bitcoin for themselves or their clients, 88% said they preferred to do this after ETFs were approved. Only 19% of advisors said they are currently able to buy crypto in their client accounts. respondents who already have crypto exposure are also in it for the long term.

98% of those advisors said that they plan to maintain or add to crypto positions this year. Matt Hogan, the CIO at Bitwise, pointed out the implications. We surveyed 400 plus financial advisors in November and December of last year. Only 39% expected an ETF approval in 2024. And folks think it's priced in. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people,

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Now, speaking of institutional flows, coin shares have released their end-of-year wrap-up on crypto fund flows. The final week of the year was a big one, with 243 million being added to assets under management for exchange traded crypto funds. That's more than double the previous week's inflows, obviously reflecting ramped-up anticipation of big moves surrounding the ETF approval. Overall, 2023 saw 2.2 billion worth of inflows into crypto products, massively outperforming the dismal 816 million of inflows for 2022, but a long way behind a 10.6 billion added in 2021. 2021. 2020 ended up the third largest year of inflows, also behind 2020, which was in second place. Bitcoin was, as you might expect, the top performer of the year, adding 1.9 billion or 86%

of total inflows. Solana was the surprise second place asset, capturing 167 million worth of inflows. Ethereum managed just 78 million in fresh capital added to funds. Coin shares research head James Butterfield noted that last year was a dramatic turnaround for the asset class, with, quote, much of the recovery in the final quarter where it became increasingly clear that the SEC was warming up to the launch of Bitcoin spot-based ETFs in the United States. Based on his models, Butterfield suggested that at current market pricing, traders are pricing in around $1 billion in seed funding for Bitcoin ETFs. So, friends, that is the ETF news from here. Every day, it's just going to be more and more

minutiae until this thing actually gets passed. But before we wrap up for the week, let's go through some other topics. The Celsius estate has announced that it will unstake existing holdings of Ethereum in order to facilitate asset distribution to creditors. Celsius said that they had, quote, started the process of recalling and rebalancing assets to ensure ample liquidity. The massive unstaking operation is already underway. Although we don't have confirmed numbers from Celsius, over 17,000 validators joined the unstaking queue yesterday, representing around $1.2 billion worth of ETH leaving the consensus mechanism. Celsius said the process will take a few days and noted that the staked Eath had, quote, provided valuable staking reward income

to the estate to offset certain costs incurred through the restructuring process. Now, some creditors were granted access to their accounts in November to withdraw 72.5% of their claims. This process will be concluded at the end of February. Other creditors will receive in-kind distributions of crypto assets in accordance with the bankruptcy plan. Moving over to Binance, Binance U.S. have hired a new chief compliance officer. Leslie O'Neill, formerly of Digital ID firm Prove Identity, will head up compliance at the embattled domestic exchange. She will be tasked with overseeing KYC, anti-money laundering, and sanctions programs, after Binance Global's deficiencies in these areas were spotlighted last year by U.S. authorities.

Notably, Binance U.S. was not part of last year's $4.3 billion settlement and is still facing enforcement action from the SEC. That case includes, among other things, an allegation that Binance Global and its CEO CZ had a backdoor to control assets stored on Binance U.S. Norman Reed, Binance U.S.'s interim CEO, said O'Neil's experience, quote, partnering with crypto companies to enhance their AML and KYC processes that prove will be exceptionally valuable as we continue to uphold the highest standards of compliance, safety, and security on our platform. Now, if you are surprised that Binance U.S. is actually still a going concern, you are not alone.

Last year saw volumes on the exchange plunged to near zero as it came under scrutiny from regulators and law enforcement agencies. The previous chief compliance officer left the exchange in November, and the firm also reportedly lost its chief risk officer in the same month, with no replacement named at this stage. Now, this hire would suggest that the company is going to continue to make a run at it in the U.S., although it seems like they have an incredible mountain to climb. Now, speaking of Binance, the SEC is seeking to leverage the recent Terraform Labs decision

in its fight against other crypto exchanges. The regulator has recently filed fresh motions in their lawsuit against Binance and Coinbase citing the Terraform ruling. In late December, a court handed the SEC a partial win against Terraform in a summary judgment. The ruling found that the Terraform stablecoin, UST, was an unregistered securities offering. This decision was largely based on the stable coin being offered in conjunction with the yield platform anchor protocol. According to the court, this gave rise to an expectation of profit for investors and made

UST an investment contract under the Howey test. The court also ruled that Luna and MIR tokens were unregistered securities offerings. In the Coinbase lawsuit, the SEC is currently defending a motion to dismiss lodged by the exchange. The SEC wrote in their new filing that, quote, terraform court resolved in the SEC's favor issues relevant to the consideration of defendant's motion in this case. Adding that, quote, each crypto asset issuer invited investors, including purchasers on Coinbase's platform, reasonably to expect the value of their investment to increase based on the issuer's broadly disseminated plan to develop and maintain that asset's value,

including through a secondary market for resale. The SEC is of course alleging that 13 tokens available on Coinbase were unregistered securities offerings. In the Binance case, the SEC is also alleging that their white label stablecoin BUSD was an unregistered securities offering as well. The regulator argues that combining the stablecoin with yield products available on the platform, Binance was offering investment contracts to users. In their filing against Binance, the SEC wrote, the court's analysis of the Terraform defendant's so-called stablecoin UST is particularly relevant to this court's consideration of defendants' arguments concerning Binance's so-called stablecoin BUSD, and defendants staking as a service B&B vault and simple earn programs.

Terraform had used similar arguments to Binance in defending their stable coin. They suggested that the separation between UST and the Anchor Protocol meant they should not be considered part of the same investment scheme. In the Binance lawsuit, the SEC is also currently fighting a motion to dismiss. Now, as the Terraform case was decided in district court, it does not form a binding precedent on either of the other cases. The judges will have discretion then to consider the Terraform decision in their own legal analysis but are able to come to their own conclusions.

The case could also be differentiated based on the facts, and circumstances. The next major event for these cases will be on January 17th, when the court will hear oral arguments in the Coinbase motion to dismiss. Lastly, today, yet another crypto-congessional ally is retiring from Congress at the end of this year. Missouri Representative Blaine Lutekemeyer has announced that he will retire from Congress at the end of 2024, marking another departure from Republican leadership. He was a senior GOP member of the House Financial Services Committee, and had previously intended to run for chairman of the committee after the retirement of Patrick McHenry, who will also leave Congress after serving out this term in office. These departures would put

French Hill, the current chairman of the subcommittee on digital assets, in line to take over as committee chairman. Hill is one of the most senior GOP members on the committee. His digital assets focused panel has worked extensively on crypto policy over the past congressional term. Hill has advocated for sensible and permissive legislation currently on the docket and would likely be a pro-crypto chairman of the pivotal committee. Ron Hammond, director of governmental relations at the blockchain association, said that Hill has a good track record of working with members across the aisle. Hammond said, if Hill were to be chair, crypto would likely remain a top-tier issue within the committee, similar to how McHenry has prioritized crypto under his chairmanship.

Hammond added that Luke Comyre was not anti-crypto, but that crypto would have been a lesser priority with him as chairman. Still, Hammond said that Luke Comyre's retirement has come as a shock in Washington, stating that even in the lobbying circles, most folks did not know this would be happening. Luke Comyre said in a Thursday statement that he had decided not to run for re-election after discussions with his family. His statement said, over the coming months as I finish up my last term, I look forward to continuing to work with all my constituents

on their myriad of issues, as well as work on the many difficult and serious problems confronting our great country. There is still a lot to do. And so, friends, there we will wrap for the weekend. I hope you are headed into a wonderful one. We are anticipating a big storm up here in the Northeast. One more big thank you to my sponsor for today's show,

Cracken. Go to crackin.com slash the breakdown and see what crypto can be. Until next time, be safe. Take care of each other. Peace.