Market View
SEC approves spot ETH ETFs
Following days of anticipation, the US Securities and Exchange Commission (SEC) voted to approve the 19b-4 filings of eight spot ether (ETH) exchange traded funds (ETFs). The SEC had recently asked exchanges to update their 19b-4 filings ahead of the final deadline for VanEck’s application (May 23), but even with the 19b-4 forms approved, these products cannot start trading immediately. The issuers must wait until their S-1 registration statements are approved by the SEC’s Corporate Finance division first. With no definitive deadline for the S-1s, that can take days, weeks or even months, depending on the complexity of the filings. The 19b-4 filings (which carried the 240-day deadline) are necessary for the exchanges proposing rule changes to list a new ETF, but the S-1 filings must provide the public with detailed prospectus information (business operations, fund management etc) about the funds themselves.
While this delay affects potential flows in the near-term, the decision itself is perceived as positive for the crypto asset class and should support overall performance, particularly following several key regulatory developments of late. In fact, we’ve previously discussed how flows might have the potential to disappoint given the relative market sizes of ETH vs BTC and the disparity in institutional demand for these assets. The reception of US ETH futures ETFs in October 2023 was below expectations, for example. Looking at other jurisdictions, Hong Kong spot bitcoin ETFs have approximately $239M AUM relative to ether at $41M – approximately a 6:1 ratio. Canadian spot ETFs have a similar ratio with CAD$2.7B and CAD$449M AUM for bitcoin and ether respectively.
Nevertheless, we think that this news may help close the gap in ETH’s underperformance to peers YTD, particularly given that the market was previously pricing in a low likelihood of approval – which we think has kept capital sidelined. In our view, ETH’s upside potential is also reinforced by the token’s better supply-side dynamics and Ethereum’s longer-term structural advantages, which we’ve discussed in a prior report.
FIT21 Act passes House
Meanwhile, The Financial Innovation and Technology for the 21st Century Act (FIT21) passed the US House of Representatives by 279 to 136, with 71 Democrats crossing party lines in support of this bill. We think this is a hugely constructive signal for clearer industry regulations in the US in the medium-to long-term. The growing recognition of crypto as an important political issue was further highlighted in a Statement of Administration Policy from the White House that opposed FIT21, but did so with a constructive tone that stopped short of a veto threat (in contrast to the statement on the SAB 121 repeal two weeks prior). For the first time, it also affirmed that “the Administration is eager to work with Congress to ensure a comprehensive and balanced regulatory framework for digital assets.”
Although this bill still needs to pass the Senate and be signed by the President before becoming law (and will likely have amendments along the way), we think this bill demonstrates a good understanding of the crypto space and is a strong signal that momentum is on the side of providing regulatory clarity in the US. The bill sets clearer guidelines for the separation of CFTC and SEC jurisdictions in digital assets, and also gives a definition for "digital commodity" [Section 103(55)(A)]. For non-decentralized systems, tokens acquired on “digital commodity exchanges” or earned via “end-user distributions” are considered digital commodities. For decentralized systems, the digital commodity status further extends to the holdings of an “affiliated person” (i.e. a person related to the token issuer).
We think this delineation makes the bill’s definition for “decentralized systems” key to watch, and two proposed decentralization conditions stand out in our view. First, a decentralized system should mean no issuer or affiliated person has controlled or directed the votes of more than 20% of the total supply in the past 12 months [Section 101(25)(B)]. This could have implications for projects with large foundation holdings or centrally controlled community reserves that exceed this threshold.
Second, the bill indicates that to be considered decentralized, no single entity should have upgraded the blockchain system in the past 3 months without a “decentralized governance system” for adopting said changes [Section 101(25)(C)]. Importantly, a decentralized governance system excludes systems where “a person or group of persons have the ability to unilaterally alter the rules of consensus or… determine the final outcome of decisions related to [the blockchain’s] development, provision, publication, management, or administration.” That said, it’s not clear in our view how this may be ultimately interpreted regarding specific client diversity or governance process requirements.
It is important to note that the SEC and CFTC can jointly issue further definitions to these terminologies [Section 105(a)(1)], and that the aforementioned clauses may change in the Senate amendment process. Still, we think the emphasis on decentralization within this bill could influence the development process for newer protocols to prioritize decentralization earlier. In fact, Section 304 creates a process by which “any person” can file to certify that a blockchain satisfies the requirements of a “decentralized system” – a status that could yield regulatory benefits.
