What is the Practical Impact of the SEC Approving 8 Ethereum ETFS and the House Passing FIT21? (#179 - 26 May 2024)
May 26, 2024
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It was a big week for the crypto ecosystem in the US, with the Ethereum ETFs being approved and the US House passing the FIT21 bill.
It's worth looking at what these two developments mean and what their impact can be.
Let's start with the Ethereum ETF approval.
The decision comes less than six months after the Securities and Exchange Commission approved bitcoin ETFs. Since launching, Bitcoin ETF inflows have already surpassed the US$12b mark.
This is another major step. 8 spot ETH ETFs were approved by the SEC in an omnibus approval, with BlackRock, Fidelity, Grayscale, Bitwise, VanEck, Ark, Invesco Galaxy and Franklin Templeton getting the green light from the regulator.
A couple of things to note.
First, this is another milestone for the crypto ecosystem. Ethereum, an asset with less than ten years of existence, is approved as part of an ETF. This will allow millions of people to have exposure in an easy and familiar way. And this is another example of how crypto is here to stay.
The second is timing. We won't see the trading of the ETH ETF immediately, but it may take a couple of weeks as the ETH ETF issuers get their S-1 form approved.
Third volumes will definitely be less than the Bitcoin ETF. The Bitcoin ETF is great as fees are almost zero for now. Here, the ETH ETF will likely also have very low fees but will not give you access to the ETH staking yield, which varies but is generally around 3-4% and is very easy to obtain with any crypto exchange using their yield offering. So, for anyone who can open an account with a crypto exchange, buying ETH and then putting it in the staking offering of that exchange may make more sense if you are planning on holding it long term.
Finally, many believe that this has all the features of political pressure. Almost nobody who follows this space believed this approval would happen this year, and this is part of the broader change of tone from the Biden administration that is realizing that people actually want access to digital assets. Let's not forget that over 50 million Americans hold crypto and heading to the November elections, it would be unwise to alienate this group, especially as many younger voters are single issue voters.
This political pressure is probably what also gave rise to the second big development of this past week, the US House passing the Financial Innovation and Technology for the 21st Century Act (or FIT21), a comprehensive piece of legislation that lays out a new overarching framework for digital assets in the U.S.
FIT21 does three main things:
Protect consumers by strengthening transparency and accountability with market participants
- Digital asset developers will be required to provide accurate, relevant disclosures, including information relating to the digital asset project’s operation, ownership, and structure, and
- Digital assets customer-serving institutions, like exchanges, brokers, and dealers, will be required to:
Protect digital asset projects:
- Digital asset developers will have a pathway to raise funds and
- Participants will have a clear process to determine which digital asset transactions are subject to the SEC’s and CFTC’s jurisdiction.
Protect digital asset customer-serving institutions:
- Establishing clear lines between the SEC and CFTC; and
- Creating comprehensive registration regimes to permit them to serve customers in digital asset markets lawfully.
There are a couple of things to note.
First, there is bipartisan support for this initiative from both Democrats and Republicans. Although the White House said the administration is opposed, the media reported that Biden is unlikely to veto.
Second, this will take time. After the House, the bill must go to the Senate, and then the SEC and CFTC have a year to do joint rule-making. A year (the rules actually specify 360 days to be precise) is a very short time frame.
It took years post Dodd-Frank to agree on definitions of standard terms like swaps, so we should expect lots of discussions not only on whether certain assets are a security or commodity but also on how to look at topics like staking, yield farming, defi, airdrops, etc. So, 2-3 years is an optimistic timeline for clarity in a best-case scenario.
Finally, the letter from the SEC Chair Gary Gensler is probably the most interesting. Some of the comments are quite shocking, including that crypto firms are unwilling to comply when we know there is a lack of clarity and many crypto firms have mentioned how they would like to be regulated, but there is no path to do so.
"Many market participants in the crypto industry, however, have shown their unwillingness to comply with applicable laws and regulations for more than a decade, variously arguing that the laws do not apply to them or that a new set of rules should be created and retroactively applied to them to excuse their past conduct." (Gary Gensler)
I would argue that many of his comments are incorrect and not objective but that is a discussion for another day! But I strongly recommend everyone to read his statement.
So overall this was a historic week in the development of digital assets in the United States. Whilst the FIT21 bill will take time, it sets the oil tanker in the right direction, something that was lacking before.
The big challenge for the U.S. here is that other countries are pushing ahead and they can accelerate their lead in the next 2-3 years as well. So whilst it may be difficult for the U.S. to attract global crypto firms, it will at least hopefully ensure that the local ones stay in the U.S. and that U.S. investors can eventually have access to digital assets in a legal and safe manner instead of them going and buying them on offshore platforms.
I recorded a podcast episode with Neal Kumar, co-head of commodities practice at Wilkie Carr, which will come out this week. I discuss the above in great detail with him.
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Henri Arslanian
*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only, and none of its content should be construed as investment or financial advice of any kind.
Who is Henri?
Henri Arslanian is the co-founder and managing partner of Nine Blocks Capital Management, an institutional-grade hedge fund focused exclusively on digital assets, with a market-neutral crypto fund focused on generating alpha from inefficiencies in crypto markets using relative value, arbitrage, and quantitative strategies.
Henri was previously a partner and global crypto leader at PwC. In that role, he advised many of the world’s leading crypto exchanges, investors, financial institutions, and tech firms on their crypto initiatives and numerous governments, regulators, and central banks on crypto regulatory and policy matters.
With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author, and is regularly featured in global media, including Bloomberg, CNBC, CNN, BBC, The Wall Street Journal, The Economist, and the Financial Times.
Henri was named by LinkedIn as one of the 2022 global Top Voices in Finance and is the host of the CryptoCapsules™ social media video series as well as The Future of Money podcast and newsletter.
