It has been an eventful two weeks in the US regulatory backdrop for crypto, perhaps the most momentous period in its history. A number of events transpired in rapid succession, all seemingly positive for the broader crypto ecosystem, marking an abrupt shift in policy ahead of the 2024 Presidential election. We unpack each event and its impact on the industry.
Senate Votes to Repeal SAB 121 (5/16)
Staff Accounting Bulletin 121 (SAB 121) is an accounting rule put forth by the SEC that went into effect on April 11, 2022 with prescriptive rules about how public companies (or their subsidiaries) should account for them. In essence, it required these companies, which include banks, exchanges, custodians, and any other entity entrusted to safeguard crypto on behalf of others to record those assets on their balance sheet (as both an asset and liability). The issue, especially for publicly traded banks, is capital charges which affect their capital adequacy and leverage ratios, making crypto assets undesirable for banks to hold. The House had already voted to repeal the rule but the Senate’s decision, which included the help of 12 Democrats, was a major political message. The White House already sent a strongly worded statement that the President would veto the bill, which he must do by Tuesday of next week. But given the abrupt change in political climate, it is not clear now where the White House stands.
FDIC Chair Steps Down (5/18)
On Monday, May 18th, embattled FDIC Chair Martin Gruenberg, announced that he would step down following the appointment of a successor. Gruenberg had been under scrutiny after widespread allegations of sexual harassment and misconduct within the agency. While the departure had nothing to do with the FDIC’s policy on crypto, its attitude on the matter under Gruenberg’s leadership was anything but supportive. The joint statement from the FDIC, OCC, and Fed in the wake of the collapse of FTX was particularly memorable, warning banks that issuing or holding in principal digital assets would be “highly likely to be inconsistent with safe and sound banking practices.” While the impact of a change in leadership on the agency's stance on crypto remains uncertain, one thing is certain - there is room for enhancement from the current status quo.
Trump Begins Accepting Crypto Donations (5/21)
It has not gone unnoticed that Presidential candidate Donald Trump’s change in attitude toward crypto coincided with an abrupt change in the current administration’s attitude towards crypto. On May 8th, Trump hosted a dinner at Mar-a-Lago for buyers of his NFT trading cards. While Trump was no fan crypto during his Presidency, according to media coverage, he was actively seeking support from cryptocurrency enthusiasts during the event. Then on May 21st, Trump’s Presidential campaign began accepting crypto donations, the first major party candidate to do so.
House Passes FIT 121 Act (5/22)
The Financial Innovation and Technology for the 21st Century Act (FIT 21) is a market structure reform bill introduced by the House Committee on Agriculture (and notably also went through the Financial Services Committee). It paves the way for a federal regulatory framework for the crypto industry, fulfilling a long-standing industry demand. Importantly, it would allow most cryptocurrencies to be treated as commodities and thus regulated by the CFTC, not the SEC. It passed the House on Wednesday with bipartisan support, including 70 democrats, roughly triple the support the SAB 121 repeal got. However, just one day prior to its passing, SEC Chair Gensler made his dissatisfaction with the bill known by issuing a statement. The morning of the vote the White House released a statement regarding the bill, featuring a significantly more collaborative tone compared to their previous statement about the repeal of SAB 121. While the bill would still need to pass the Senate before becoming a law, this statement from the White House was a major departure from their previous statement on crypto and a stark difference from the comments from the Chair of the SEC.
SEC Approves Spot ETH ETFs (5/23)
On Thursday afternoon, the SEC approved the 19b-4 change of rule request forms for exchanges to list and trade 8 spot ETH ETFs, making ETH the second cryptocurrency to get the ETF approval by the SEC. This cements the SEC’s viewpoint that ether is commodity and not a security. It will take some time before trading begins as it usually takes the SEC 30 days to review and approve registration statements. The spot bitcoin ETF situation was unique (trading began the next day) because the SEC had already been in heavy consultation with the issuers, unlike in this case where the SEC has yet to meet with a single issuer.
The approval by the agency is an abrupt change from its posture, one that many, including us, did not foresee just a week ago. It is important to note that the SEC Commissioners did not vote on this issue like they did in the case of the bitcoin ETFs, and the division of Trading and Markets is the entity that approved the 19b-4s. Presumably it wouldn’t have done so without support of the Commissioners, though. Our understanding of the situation is that things changed abruptly on Monday (5/20), likely in response to the changing regulatory and legal climate towards crypto as detailed above. Before that, the posture from the SEC towards crypto at large was not welcoming, allowing for a spot bitcoin ETF only after losing in court. Leading up to the May 23rd approval deadline for spot Ethereum ETFs, there had been no signs the regulator was leaning towards approval, as it had conducted zero meetings with prospective issuers while it had conducted 24 such meetings ahead of the spot bitcoin ETF approval. Ethereum development shop Consensys even went to the lengths of suing the regulator, alleging it was gearing to classify ether, the native asset of Ethereum, as a security, which would have effectively ended any hopes of a ’33 Act ETF.
When Will ETFs Begin Trading?
There is no set amount of time for the SEC to deem the registration statements effective, but typically it takes about 30 days for the Division of Corporation Finance to review these documents. We may see meetings between the issuers and the SEC (and subsequent amendments filed) as the issuers work to get their documents in shape. The controversial issues, in-kind create/redeem and staking, at least seem to be foregone conclusions as to be out of consideration for any ETH ETF launch. Our guess is that like the spot bitcoin ETFs, the SEC won’t play favorites and allow trading to begin for them all at once. All the top players in the bitcoin ETF competition have returned for another round, with the exception of WisdomTree and Valkyrie. WisdomTree manages the smallest spot bitcoin ETF, while Valkyrie was recently acquired.
One important strategic change, however, is that Grayscale has opted to push its Grayscale Ethereum Mini Trust (ticker ETH), the (expected) low-cost alternative to the Grayscale Ethereum Trust (ticker ETHE) to the forefront this time, filing a 19b-4 (but not part of the initial SEC approval). Our guess is Grayscale does not want a replay of the spot bitcoin ETF launch, which saw the high-cost GBTC hemorrhage funds to competitors. The Grayscale Ethereum Mini Trust still hasn’t started the official SEC review process, however, so it’s unclear when it might begin trading, plus we don’t know fees for either ETH or ETHE yet. ETHE’s fee is currently 2.5%. We would expect fees for the cohort of spot ETH ETFs to be in the range of where they are for the BTC ETFs, 20 – 30 bps, with fee breaks based on AUM and duration.
How Big Could ETH ETFs Get?
While this game is always a challenge (the popularity of the spot bitcoin ETFs certainly has pleasantly outpaced our initial expectations), at this point we have some guideposts with the bitcoin ETFs, both spot and futures. Some analogies, however, have been very incongruous. For example, the ETH futures ETFs, which launched in October of last year, have been wildly unpopular compared to the launch of the BITO bitcoin futures ETF, gathering less than 2% of the inflows in the first 90 days. Much of that likely had to do with cycle timing as the launch of BITO marked THE last cycle peak, while the launch of the ETH futures ETFs came amidst a very bitcoin dominated part of the cycle (still true today).
