If you have any semblance of interest in cryptocurrency trading, you should’ve already heard that the Ethereum ETF approval by the SEC (Securities and Exchange Commission) is well on its way. Cryptocurrency investors are about to get the opportunity to buy into some brand new exchnage-listed products in the coming days or weeks, pending final confirmation from the regulator.
The long-held opposition on part of the chief US financial regulator and its Chair Gary Gensler to the second largest cryptocurrency by market cap receiving a dedicated ETF listed on US exchanges, has been largely overcome, and not without political pressure.
Coinciding with the passing of a key cryptocurrency-related bill by the U.S. House of Representatives, called FIT 21 on Wednesday, the Ethereum ETF approval could set the stage for a broader cryptocurrency market rally. That said, the Financial Innovation and Technology in the 21st Century Act still needs approval in the Senate to be signed into law.
Political Pressure for the Ethereum ETF Approval
The approval of the Ethereum ETF has been a marked shift in regulatory opinion - up until this week the market has not been pricing in an approval of the product in the immediate future, and that literally changed with a couple of tweets. Arguably, the first one was from Bloomberg’s Senior ETF Analyst Eric Balchunas.
Update: @JSeyff and I are increasing our odds of spot Ether ETF approval to 75% (up from 25%), hearing chatter this afternoon that SEC could be doing a 180 on this (increasingly political issue), so now everyone scrambling (like us everyone else assumed they'd be denied). See… https://t.co/gcxgYHz3om
— Eric Balchunas (@EricBalchunas) May 20, 2024
The resulting circa 20% rally in Ethereum was abrupt and caught some of the market wrong-footed, exacerbating the move into a very sharp rally on late Monday. After consolidating in a newly established range after the news, on Thursday morning another bomb tweet from the same author highlighted a newer development.
A bipartisan group of House lawmakers, including Majority Whip Tom Emmer and NJ Democrat Josh Gottheimer, has sent a letter to SEC Chair Gary Gensler urging the approval not only of spot Ether ETFs but also other digital asset ETFs.
A bipartisan group of House lawmakers (incl Majority Whip Tom Emmer and NJ Democrat Josh Gottheimer) have sent Gary Gensler a letter urging the SEC to approve spot Ether ETFs (and 'other' digital assets) bc it offers investors crypto access in regulated transparent safe format pic.twitter.com/YLSJh6n0lF
— Eric Balchunas (@EricBalchunas) May 23, 2024
The lawmakers view the approval of spot Bitcoin ETPs (exchange-traded products) as a significant milestone for both digital assets and financial markets. They believe that these products provide a safe and regulated investment vehicle for cryptocurrency exposure and reflect the SEC’s commitment to investor protection and modernisation of financial markets.
The letter emphasizes that the transparency and reporting requirements of ETPs will aid in mitigating market manipulation and other illicit activities. The SEC’s Chairman Gensler is urged to apply the same principles used in approving Bitcoin ETPs when considering Ethereum ETP applications, and highlights that the legal considerations for both are similar.
With the looming U.S. election and a broadly supportive Congress as it relates to new crypto legislation, the next phase of growth for the industry, could be mere months away. Notwithstanding significant liquidity shocks to the market, cryptocurrencies have been legitimised as an accessible investment vehicle, despite the SEC Chair Gensler’s vocal opposition.
The Financial Innovation & Technology Bill Explained
On Wednesday, House democrats and republicans banded together and passed a new piece of legislation which aims to outline more specific definitions as to which cryptocurrencies are considered securities and will fall under the SEC’s regulatory umbrella.
If the blockchain used in a cryptocurrency is functional and decentralised, it will fall under CFTC’s oversight. As to centralised blockchain networks, those will be designated as securities and fall under the more strict regulatory oversight of the SEC.
Despite opposition from SEC’s Chair Gary Gensler, who argued that regulatory gaps are to be expected under the proposed framework, FIT 21 passed with the votes from 71 democrats and 208 republicans.
Gensler highlighted that problems for investors continue to be ample and mainly caused by noncompliance with existing rules, instead of regulatory ambiguity. Nevertheless the regulatory body has dropped its opposition to the approval of an Ethereum ETF after political pressure.
The SEC’s chair expressed his worries that FIT 21 is allowing issuers to self-certify decentralization, thus escaping SEC oversight and potentially operating under lighter CFTC regulation.
The Vice Chairman of the House Financial Services Committee and Chairman of the new subcommittee tasked with overseeing all areas related to digital assets and financial technology, representative French Hill, (R) AR defended the bill, asserting it does not create loopholes or deregulate crypto but provides clarity.
House Financial Services Chair Patrick McHenry highlighted that FIT 21 resolves regulatory confusion between the SEC and CFTC, offering clear rules and strong guardrails for digital asset engagement.
ETFs Beyond Bitcoin & Ethereum
It remains to be seen how can a company prove that the blockchain it uses is decentralised, but with potential ETF approvals for more digital assets, the cryptocurrency regulatory framework in the U.S. is likely to continue its development in the coming quarters.
The events that unfolded this week could be only the beginning of the end of the heavy Bitcoin and Ethereum domination of the cryptocurrency market that has been creeping in since the first rumours of ETF approvals circulated.
With most smaller cryptocurrencies missing the unique rally of the two biggest crypto chains, speculation about the future of future ETF products related to more digital tokens could be starting right around the corner.
