Ethereum ETF, regulation, and Trump: decrypting crypto’s latest developments

What happened

Last week, the SEC approved the 19b-4 forms submitted by several exchanges (Nasdaq, CBOE, NYSE) to list spot Ethereum ETFs. Although the SEC still needs to approve the issuers' S-1 filings (by VanEck, Ark/21Shares, BlackRock Inc, Invesco Ltd/Galaxy Digital, etc.), this development marks a significant milestone in granting U.S. investors access to a second spot crypto ETF, following the approval of spot Bitcoin ETFs in January.

In parallel with the SEC's actions, the U.S. House of Representatives passed the most comprehensive (and controversial) crypto bill to date. This was not the only regulatory move, as a few days earlier, the Senate overturned an SEC rule that imposed strict obligations for digital asset custody.

The week would not have been complete without former President Trump announcing to be the pro-crypto candidate.

Impact on our Investment Case

Getting ready for the spot Ethereum ETFs

When the judges in the DC Circuit Court of Appeal ruled in August 2023 that the decision to deny the conversion of the Grayscale Bitcoin Trust to an ETF while allowing Bitcoin futures ETFs was "arbitrary and capricious," the SEC had no choice but to approve the spot Bitcoin ETFs. In the past, the SEC also approved Ethereum futures ETFs. Therefore, last week's decision is not a big surprise, as we anticipated it. But looking at the price appreciation of Ethereum (approx. +20%), market participants were positively surprised by the timing of the approval.

However, U.S. investors will need to be patient before having a securitized version of Ethereum. The issuers' S-1 filings are more complex for Ethereum than for Bitcoin. A lot of discussion is likely to center around the staking of the assets within the ETFs (as we detailed in this article, staking involves locking up coins to ensure the proper and secure functioning of the protocol, in exchange for a reward). Several issuers have amended their filings and dropped this functionality to avoid prolonged discussions with regulators.

We believe it will take months, rather than days or weeks, before a spot Ethereum ETF is available in the United States. Nonetheless, the process has started. The benefits observed with spot Bitcoin ETFs, such as improved accessibility to a new asset class for U.S. investors and the institutionalization of the ecosystem, will also apply to this vehicle.

Is crypto regulation finally coming? Or not?

The bipartisan passage of the Financial Innovation and Technology for the 21^st Century Act (FIT21) in the U.S. Representative Houses is the most ambitious regulation for the blockchain industry to date. In particular, the role of the regulatory bodies will be clarified – the SEC would be in charge of centralized blockchains, while the CFTC would regulate digital assets like commodities for functional and decentralized protocols. Additionally, the bill ensures oversight of crypto exchanges, protecting final investors.

Although the bill has been discussed since last year and is a bipartisan effort, it still needs Senate approval, where its passage is less certain. And even if it goes through the upper chamber, Biden said in a statement that he opposed the bill, although he did not say if he would veto it. In a previous statement, he had threatened to veto the law. The change in tone can be seen as positive. Regarding the SEC, as always, the agency is strongly against it.

There is significant political maneuvering behind these announcements. The FTX debacle should have accelerated crypto regulations in the United States, but little progress has been made. By passing this regulation, representatives can claim they took action to address the issue when campaigning for the next elections.

On a related note, the U.S. Congress also overturned SAB 121, a SEC regulation that required companies to book any crypto held in custody on their balance sheets, impacting capital requirements, especially for banks. While Biden still has a few hours to veto the bill, this action shows once more lawmakers' desire to move forward.

Trump is building a crypto army

With > 50mn Americans owning cryptos, Trump has recognized that cryptocurrencies are a significant topic for the next election, particularly among younger generations. Through blockchain technology, Trump aims to promote individual freedom (e.g., self-custody of digital assets) and innovation in financial technology. This aligns with our view of Blockchain as a foundational pillar of Fintech.

Trump has announced he is accepting crypto for fundraising purposes. While details are still forthcoming, he aims to build a "crypto army." This stance contrasts with Biden and the SEC's more traditional approach. Beyond the political gamesmanship, this might pressure Democrats to reconsider their approach to crypto regulation to avoid losing electoral support.

Our Takeaway

The approval of the 19b-4 filings for spot Ethereum ETFs marks a significant step forward. Institutional investors will soon have easy access to a second instrument in the asset class of cryptocurrencies. While Bitcoin is often seen as a store of value, Ethereum serves as the backbone of blockchain infrastructure. The dominance of these two leaders (i.e., their combined market cap divided by the total market cap of all cryptocurrencies) is expected to remain high.

Although formal approval will take time, once cleared, we anticipate strong positive inflows similar to those seen with spot Bitcoin ETFs (~$13.5 billion in net inflows since their approval in January). The approval impact on Ethereum price may be even greater than on Bitcoin, as ~27% of eligible tokens are currently staked (reducing the potential supply). Nevertheless, this ETF development will benefit the entire ecosystem, including our blockchain-related stocks. For instance, Coinbase Global Inc will again play a crucial role (custody, trading, surveillance agent, etc.) for five of the eight pending S-1 filings.

The SEC's approval also demonstrates that the regulatory agency is accountable to the courts. However, we do not expect other cryptocurrencies (e.g., Dogecoin, Solana, Ripple) to receive ETF approval until there is greater regulatory clarity. Nonetheless, progress is being made on this front, transcending political maneuvering.

Americans demand and deserve a better regulatory framework for blockchain and crypto, and they will achieve it. This framework will better protect retail investors and transition the industry from the "institutionalization phase" to the "mass institutionalization phase." Moreover, the United States cannot afford to let blockchain technology development shift offshore. The development of more scalable protocols is accelerating, paving the way for an exponential launch of applications. The stakes are too high to allow the industry to grow outside the U.S.

The crypto bull cycle is far from over, and our blockchain-related stocks stand to benefit from it.