edit | Wu Blockchain about blockchain
In this episode, Colin, founder of Wu Blockchain, and his old friend Lawyer Winter Soldier talked about the causes and consequences of the sudden approval of the Ethereum spot ETF this week, and explored in depth the reasons for this major transformation. We also discussed the far-reaching FIT21 bill and what impact it will have on the industry. Lawyer Winter Soldier predicts that the final price of Ethereum in this cycle will rise to 6K to 8K. We generally believe that the SOL ETF is unlikely to be approved and passed in this cycle.
Audio to text conversion uses GPT, so there may be errors.
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## What is the reason why ETH spot ETF was suddenly passed
This incident can be traced back to the approval of the Bitcoin ETF in January this year. When the Bitcoin ETF was approved, I thought that the Ethereum ETF would be approved sooner or later. Why do I think so? Because after the Bitcoin ETF was approved, the US SEC issued a statement that explained in detail the reasons and analysis framework for the approval of the Bitcoin spot ETF. This laid the policy foundation for all future cryptocurrency ETF applications.
In the statement, the SEC used an analysis framework called Ark Analysis Test, which was provided by the Ark Fund and adopted by the SEC. This framework lists several key reasons:
1. Existence of futures trading: The approval of spot ETFs must be based on a mature futures trading market, especially an officially recognized exchange such as CME (Chicago Mercantile Exchange).
2. Small price deviation: The deviation between the price of futures ETF and spot price cannot be too large. This proves that the market will not be manipulated by spot ETF.
3. Market maturity: Futures ETFs have been running for some time and have performed stably, which further supports the maturity and stability of the spot market.
These factors together form the basis for the approval of spot ETFs. Previously, the SEC rejected all spot ETFs because it was worried that spot prices could be manipulated. But now, if there is no big deviation between the futures ETF and the spot price, the SEC can consider that there is no risk of market manipulation and approve the spot ETF.
In summary, the approval of spot ETFs requires two important conditions: one is a mature futures trading market, and the other is the stability between spot and futures prices. Based on these conditions, the SEC believes that the spot market will not be manipulated, and thus approved the Ethereum spot ETF. This is why the Ethereum spot ETF was successfully approved after the Bitcoin ETF was approved.
## The political struggle between the two parties in the United States behind the approval
The SEC's filings do include a lot of discussion about the correlation between the CME futures ETF and the spot trading platform. They conducted a 90-day rolling correlation analysis and found that the correlation was very high. This further proves my previous judgment that the Ethereum ETF is a high probability event.
Both Ethereum and Bitcoin are traded on CME, and the SEC has approved a spot ETF for Bitcoin. If the SEC approves a spot ETF for Bitcoin but rejects a spot ETF for Ethereum, it will go back to the Grayscale v. SEC case, where the SEC will be sued by the court for discriminatory enforcement. Moreover, the US courts are unlikely to support such discriminatory enforcement, especially since the Grayscale case has already caused the SEC to fail in court once.
Therefore, the SEC cannot reject the Ethereum spot ETF for blunt reasons. However, many people are still not optimistic about the passage of the Ethereum spot ETF, and I think this is largely due to political considerations. This year, Republicans and Democrats have had obvious differences on the issue of cryptocurrency. This is shown by the voting of the two party members in the Bitcoin spot ETF vote.
After the successful approval of the Bitcoin spot ETF, some policymakers who oppose cryptocurrencies may put pressure on the SEC to not quickly approve the second cryptocurrency spot ETF. However, based on legal analysis, the SEC has no sufficient reason to directly reject the Ethereum spot ETF. They can delay the approval time through technical operations, such as asking for more time to observe the difference between the futures ETF and the spot price on the grounds that the futures ETF was approved in a shorter time.
However, recent developments were unexpected. The SEC approved the Ethereum spot ETF before the May 23 deadline, which was beyond most people's expectations. Everyone might have expected the SEC to delay until the end of the year or even next year, but they approved it so quickly. The reason for this approval may need to be considered in conjunction with the recent FIT21 bill.
The FIT21 bill received overwhelming support in the House of Representatives, resolving the long-standing issue of jurisdictional division between the SEC and the CFTC that has plagued the U.S. cryptocurrency industry. The two agencies have been competing for jurisdiction over the cryptocurrency market, and the passage of this bill is critical to the SEC's approval of the Ethereum spot ETF.
After Gensler took office, this struggle may have intensified. He thinks he knows cryptocurrencies very well and wants to get the regulatory power. The CFTC was also very interested in cryptocurrencies before and did a lot of work. The Ethereum issue is in a gray area between the SEC and the CFTC. The SEC believes that Ethereum is under its jurisdiction, while the CFTC tacitly believes that Bitcoin and Ethereum are commodities. Therefore, there is a power struggle between the two.
If the FIT21 bill is passed, this jurisdictional dispute will no longer exist, and the SEC will not be able to treat Ethereum as a security for jurisdiction.
## What exactly does the FIT21 Act stipulate and how is decentralization defined?
The core point of FIT21 is the distinction between securities and commodities. Securities are governed by the SEC, while commodities are governed by the CFTC. The basis for the division is the degree of decentralization of the cryptocurrency itself, with the most critical factor being the distribution ratio of holders. There is a 20% ratio. If a large holder holds more than 20%, it is considered not decentralized enough and may be classified as a security. If there is no such large holder, it can be classified as a commodity and governed by the CFTC.
Ethereum has a high degree of decentralization, so according to this standard, it should not be under the jurisdiction of the SEC. In this case, the SEC knew the voting tendency and results of the House of Representatives in advance, so it stopped resisting unnecessarily and followed the trend and quickly approved the Ethereum spot ETF. This can be seen as a 180-degree turn without further entanglement.
At the same time, there is also a mainstream analysis that Trump's support for cryptocurrencies may have also affected the attitude of the Biden administration. Trump said in his speech that if you hold cryptocurrencies, you should support him, while Biden was ridiculed for not even knowing what cryptocurrencies are. This provocative statement may have affected some of the Biden administration's policies and attitudes.
During the bull market, many people have a positive view of cryptocurrencies, especially young voters, who want more open policies. Although the FIT21 bill still needs to be passed by the Senate and ultimately approved by Biden, the Biden administration's statements on the bill have become much milder. This change in attitude may also have affected the SEC's approval of the Ethereum spot ETF.
As for the success of the Bitcoin ETF, its inflows have exceeded expectations, pushing the price of Bitcoin to new highs. Currently, the scale of funds in the Bitcoin ETF has reached $50 billion and is expected to reach $100 billion soon, accounting for 1% of the US asset management scale.
## How high will the price of Ethereum rise as a result
I am still used to looking at this issue through the exchange rate between Ethereum and Bitcoin. In the last cycle, after the success of Ethereum's DeFi revolution, it quickly grew into a basic cryptocurrency as important as Bitcoin. I don't think Ethereum is a Altcoin. It is already a core asset of cryptocurrency like Bitcoin.
At the end of 2021, the price of ETH/BTC was maintained in the range of 0.06-0.08, similar to a peg state. However, recently the exchange rate has fallen to around 0.04. This drop was mainly caused by the expectation of the passage of the Bitcoin spot ETF. From October 2023, the expectation of the passage of the Bitcoin ETF began to rise, causing the ETH/BTC exchange rate to fall rapidly.
But now, the Ethereum spot ETF is also about to be approved, and the gap between the two in this regard has been eliminated. I guess the ETH/BTC exchange rate may return to its previous level, which is above 0.06. If Bitcoin can reach $100,000 in the future, it is also possible for the price of Ethereum to reach $6,000-8,000.
Of course, this forecast is relatively conservative, and the actual situation still depends on the macroeconomic trend. At present, the macroeconomic trend is relatively favorable to the development of cryptocurrencies. Different people have different views on Ethereum. Some people believe that Ethereum has more ecological applications and imagination than Bitcoin. Therefore, Ethereum may once again surpass Bitcoin in the future because it has greater potential and innovation space, while Bitcoin is relatively conservative.
## Does developer control affect the definition of decentralization?
The question of developers’ control over chain updates has always been a controversial issue within the community. It is difficult to legally touch upon such a deep issue as how much control the core development team has. From the perspective of legal enforcement, it is more about the distribution of token holdings rather than the control of developers over the technical route. This is because the influence of developers is more often based on technology and community consensus rather than economic interests.
Judging from the current bill, it is unlikely to discuss the issue of developer control. It mainly depends on the distribution of holders. If one person or a group of people acting in concert holds a large number of tokens, it will be considered not decentralized enough. But if it is just an influential spiritual leader, it is not considered not decentralized enough.
Regarding the issue of voting rights, if the bill is strictly enforced, the distribution of voting rights needs to be clarified to ensure that no one holds more than 20% of the voting rights. Otherwise, many tokens may face compliance issues, especially those where voting rights are concentrated in the hands of foundations or founders.
The passage of this bill may have a profound impact on the entire cryptocurrency industry, similar to the division of rules in traditional finance and accounting. In the future, all cryptocurrency projects may need to adjust in this direction to ensure that they meet decentralized standards.
## Will the Ethereum Foundation continue to be investigated?
I think the SEC may not continue to investigate the Ethereum Foundation. Although there were rumors of an investigation before, considering that the Ethereum spot ETF has been approved, the SEC may re-evaluate their priorities. The situation of UnitSwap is different because it involves issues with the exchange, and the SEC's investigation may continue.
If Ethereum is considered a commodity cryptocurrency that meets the new decentralized standards, the SEC has no reason to continue investigating whether it is a security. The new FIT21 law will give the SEC a clear scope of authority, and they may focus their attention on cryptocurrencies that are not decentralized enough.
Although the new bill may take time to pass, it has already triggered thinking about the boundaries of the SEC's power. Future regulatory policies may be adjusted, especially considering the different positions of the two parties on cryptocurrency regulation.
The Democratic Party has chosen to suppress cryptocurrencies in the market environment and oppose the Republican Party. Such a strategy may lose voter support. Supporters of the cryptocurrency community are mostly young and distributed in Silicon Valley and Wall Street, which are the Democratic Party's strongholds. Therefore, the Democratic Party's position on this issue may change to avoid losing voter support.
Overall, considering the current political climate and market environment, it may not be wise for the SEC to stick to past practices. The possibility of the Senate passing the bill is not low, especially during the bull market, when cryptocurrency supporters are more active, which will also affect future policy directions.
## Will the SOL ETF pass?
I think the Solana spot ETF is less likely to be approved. The main reasons are as follows:
1. Lack of futures ETF: According to current regulations, there must first be a futures ETF before you can apply for a spot ETF. However, Solana currently does not have a futures ETF, which means it still has a long way to go.
2. Insufficient decentralization: Solana is not as decentralized as Bitcoin and Ethereum. In particular, FTX previously held a large amount of Solana, which increased its risk of centralization. If the FIT21 bill continues to emphasize the value of decentralization in the future, Solana may be considered insufficiently decentralized and thus be identified as a security.
3. Market capitalization issue: Solana’s market capitalization is far behind Bitcoin and Ethereum. Smaller market capitalization means insufficient market depth and liquidity, which may affect the SEC’s approval of its ETF application. Similarly, Hong Kong also chose Bitcoin and Ethereum, which have larger market capitalizations, instead of Solana when determining the cryptocurrencies that retail investors can trade.
Based on the above points, I think it is unlikely that the Solana spot ETF will be approved in the near future, and even unlikely to become a reality in the entire cycle. The current expectations are more market hype, but the possibility of actual approval is low.
## Why is the Hong Kong ETF so poor?
First, there is a significant gap between the size of Hong Kong's financial market and that of exchanges in the United States. The amount of funds in the Hong Kong market is much smaller than that in the United States. In addition, there is a large amount of southbound funds in the Hong Kong financial market, mainly from the mainland, and these funds cannot currently be invested in Hong Kong's cryptocurrency ETFs. Therefore, the source of funds for Hong Kong's cryptocurrency ETFs is limited, and the trading volume is naturally difficult to compare with that of the US cryptocurrency ETFs.
If southbound funds from the mainland are allowed to invest in virtual currency ETFs in Hong Kong in the future, the amount of funds in the market may increase, but this restriction still exists. In addition, Hong Kong's ETFs face process and cost disadvantages in attracting investors. For example, some of the holders of US ETFs are Hong Kong hedge funds and other global institutions, which prefer to buy more advantageous US ETFs rather than Hong Kong ETFs.
Hong Kong ETFs must offer better advantages than US ETFs, otherwise investors would prefer to buy US ETFs. Hong Kong ETFs have higher fees and a relatively small market, making it difficult to compete with US competitors. Leaders in the US market, such as BlackRock and Fidelity, have very strong global sales and brokerage systems and hold a large number of old customers, which is difficult for Hong Kong's Chinese funds to match.
Therefore, the dismal performance of Hong Kong cryptocurrency ETFs can be attributed to market size, funding source restrictions, process and fee disadvantages, and the gap in competitiveness with US ETFs. Future development still depends on whether the financial interaction between the mainland and Hong Kong can be further strengthened, thereby bringing more funds and market opportunities.
## Which project are you optimistic about and participating in recently?
Recently, I participated in the Ethena stablecoin project, which I think is quite interesting. I also have some friends who are participating in this project, but they need to pay attention to the risks. Although the stablecoin has a good yield, there is always the shadow of the previous Luna incident, so you can participate in it in the short term, but you must always be cautious.
Ethena's ENA token mechanism is very interesting. It guides investors' behavior through incentive mechanisms. For example, some people are willing to pledge, and some are willing to provide liquidity. This diversified investment behavior can maintain the overall rate of return, rather than relying solely on staking.
I am still full of hope for the future of Ethereum. Ethereum's infrastructure is already very complete, and the second-layer network has also solved many bottleneck problems in the development of the ecosystem, such as handling fees and transaction processing speed. I believe that future innovations may occur on Ethereum's second-layer network.
