In this issue, Colin, the founder of Wu Blockchain, chatted with his old friend, Lawyer Winter Soldier, about the causes and consequences of the sudden approval of the Ethereum spot ETF this week, and delved into the reasons for this major transformation.
We also discussed the impact of the far-reaching FIT21 bill on the industry. The Winter Soldier lawyer 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.
Risk warning: The contents of this issue do not constitute any financial advice. Personal investment behavior has nothing to do with Wu Blockchain media position. Please strictly abide by local regulations.
What is the reason why ETH spot ETF suddenly passed?
This incident can be traced back to the passage of the Bitcoin ETF in January this year. When the Bitcoin ETF passed, I thought that sooner or later the Ethereum ETF would also pass. Why do you think so? Because after the adoption of the Bitcoin ETF, the U.S. SEC issued an announcement explaining in detail the reasons and analysis framework for adopting the Bitcoin spot ETF. This lays the policy foundation for future ETF applications for all cryptocurrencies.
In the announcement, the SEC used an analysis framework called the Ark Analysis Test, which was provided by the Ark Fund and adopted by the SEC. This framework lists several key reasons:
- The existence of futures trading : The adoption of spot ETF must be based on a mature futures trading market, especially an officially recognized exchange, such as CME (Chicago Mercantile Exchange).
- Small price deviation : The deviation between the price of futures ETF and the spot price cannot be too large. This proves that the market is not manipulated because of spot ETFs.
- Market maturity : Futures ETFs have been operating for some time and have stable performance, which further supports the maturity and stability of the spot market.
Together, these factors form the basis for spot ETF approval. The SEC's previous rejection of all spot ETFs was based on concerns that spot prices could be easily manipulated. But now, if there is no significant deviation between futures ETFs and spot prices, the SEC can consider that there is no risk of market manipulation and approve spot ETFs.
In summary, the approval of spot ETFs needs to meet 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 believed that the spot market would not be manipulated and approved the Ethereum spot ETF. This is also why the Ethereum spot ETF was able to pass smoothly after the Bitcoin ETF passed.
The political struggle between the two parties in the United States behind the ratification
The SEC filings did contain a lot of discussion about the correlation between CME futures ETFs and spot trading platforms. They conducted a 90-day rolling correlation analysis and found that the correlation was very high. This further proves my previous judgment that the passage of the Ethereum ETF is a high probability event.
Both Ethereum and Bitcoin trade on CME, and the SEC has approved a spot ETF for Bitcoin. If the SEC approves the Bitcoin spot ETF but rejects the Ethereum spot ETF, it will return to the situation of the Grayscale v. SEC case, that is, the SEC will be sued by the court due to differential enforcement. Moreover, there is a high probability that the U.S. courts will not support this kind of differential enforcement, especially since the Grayscale case has already caused the SEC to fail once in court.
Therefore, the SEC cannot reject the Ethereum spot ETF on rigid grounds. 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, there have been clear differences between Republicans and Democrats on the issue of cryptocurrency. This was shown by the bipartisan vote of committee members in the Bitcoin Spot ETF vote.
After the successful passage of the Bitcoin spot ETF, some anti-cryptocurrency policymakers may apply pressure not to allow the SEC to quickly pass a 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 using the shorter approval time of futures ETFs as an excuse to require more time to observe the difference between futures ETFs and spot prices.
However, recent developments have been unexpected. The SEC approved an Ethereum spot ETF ahead of the May 23rd deadline, exceeding most expectations. You might have expected the SEC to delay until the end of the year or even next year, but they approved it so quickly. The reasons 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 SEC and CFTC jurisdictional issues that have plagued the U.S. cryptocurrency industry for a long time. 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 came to power, this competition may have intensified. He thinks he knows a lot about cryptocurrencies, and he especially wants to get this regulatory power. The CFTC has also been very interested in cryptocurrencies before and has done a lot of work. Ethereum’s problems lie in the twilight zone between the SEC and the CFTC. The SEC considers Ethereum to be under its jurisdiction, while the CFTC tacitly considers Bitcoin and Ethereum to be commodities. Therefore, there is a power struggle between the two.
If the FIT21 bill is passed, this jurisdictional dispute will not exist, and the SEC will not be able to regulate Ethereum as a security.
What exactly does the FIT21 bill provide for, and how is decentralization defined?
The core point of the FIT21 bill is to distinguish between securities cryptocurrencies and commodity cryptocurrencies . Securities cryptocurrencies fall under the jurisdiction of the SEC, while commodity cryptocurrencies fall under the jurisdiction of the CFTC.
The basis for division is the degree of decentralization of the cryptocurrency itself, of which the most critical factor is the distribution ratio of holders. There is probably a 20% ratio. If a large holder holds more than 20% of the share, it is considered not decentralized enough and may be classified as a security; if there is no such large holder If there are people, it can be classified as a commodity and fall under the jurisdiction of the CFTC.
Ethereum is highly decentralized, so under this standard it should not fall under SEC jurisdiction. In this case, the SEC knew the voting tendency and results of the House of Representatives in advance, so it no longer made unnecessary resistance, but followed the trend and quickly approved the Ethereum spot ETF. This can be seen as a 180-degree turn without much fuss.
At the same time, there is also a mainstream analysis that Trump’s support for cryptocurrency may have also affected the attitude of the Biden administration. Trump said in his speech that if you hold cryptocurrency, you should support him, while Biden was ridiculed that he might not even know what cryptocurrency is. This provocative statement may have influenced some policies and attitudes of the Biden administration.
During the bull market, many people viewed cryptocurrencies favorably, especially younger voters who wanted more open policies. Although the FIT21 bill still needs to pass the Senate and ultimately require Biden's approval, the Biden administration has become much softer in its announcement of the bill. This change in attitude may also have influenced the SEC’s approval of an Ethereum spot ETF.
As for the success of the Bitcoin ETF, its inflows exceeded expectations, driving the price of Bitcoin to new highs. At present, the capital scale of Bitcoin ETF has reached 50 billion US dollars, and is expected to reach 100 billion US dollars soon, accounting for 1% of the US asset management scale.
How much will the price of Ethereum rise as a result?
I am still used to looking at this issue through the exchange rate of Ethereum and Bitcoin. After the success of Ethereum's DeFi revolution in the last cycle, it quickly grew into a foundational cryptocurrency as important as Bitcoin. I don’t think Ethereum is an Altcoin, it is already a core asset of cryptocurrency like Bitcoin.
At the end of 2021, the price of ETH/BTC remained in the range of 0.06-0.08, similar to an anchoring state. However, the rate has recently fallen to around 0.04. This decline was mainly caused by the expectation of the adoption of the Bitcoin spot ETF. Starting from October 2023, the expectation of the adoption 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 pass, and the gap between the two in this aspect has been smoothed out. My guess is that 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 Ethereum to reach $6,000-8,000.
Of course, this forecast is relatively conservative, and the actual situation also depends on macroeconomic trends. At present, macroeconomic trends are more positive for the development of cryptocurrency. Different people have different views on Ethereum. Some people think that Ethereum has more ecological applications and imagination than Bitcoin. Therefore, Ethereum may once again emerge as a narrative that surpasses Bitcoin in the future because it has greater potential and room for innovation, while Bitcoin is relatively conservative.
Does developer control affect the definition of decentralization?
Regarding the issue of developers’ control over chain updates, this has always been a controversial issue within the community. How much control does the core development team have? It is difficult to touch such a deep issue legally. From a legal enforcement perspective, it depends more on the distribution of token holdings rather than the developer’s control over the technical route. 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 acting in concert holds a large number of tokens, this is considered not decentralized enough. But if there are only influential spiritual leaders, this is not decentralized enough.
Regarding the issue of voting rights, if the bill is strictly implemented, 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 power is 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 traditional financial and accounting rules. In the future, all cryptocurrency projects may need to adjust in this direction to ensure compliance with decentralized standards.
Will the Ethereum Foundation continue to be investigated?
I think the SEC may not continue to investigate the Ethereum Foundation. Despite previous rumors of an investigation, the SEC may re-evaluate their priorities now that the Ethereum spot ETF has passed. The situation with Uniswap is different, as it involves issues with the exchange and the SEC’s investigation is likely to continue.
If Ethereum is considered a commodity cryptocurrency that meets the new decentralization standards, the SEC will have no reason to continue investigating whether it is a security. The new FIT21 bill will delineate clear licensing authority for the SEC, and they may focus 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. Regulatory policies may be subject to change in the future, especially given the different positions of the two parties on cryptocurrency regulation.
The Democratic Party chose to suppress cryptocurrency in the market environment and form a confrontation with the Republican Party. Such a strategy may lose voter support. Supporters of the cryptocurrency community are mostly young and located in Silicon Valley and Wall Street, which are Democratic Party vote bases. As a result, the Democratic Party's position on this issue may shift to avoid losing support among voters.
Overall, given the current political climate and market environment, it may not be wise for the SEC to stick to its past practices. The possibility of the Senate passing the bill is not low, especially during the bull market, when cryptocurrency supporters are more active and will also affect future policy directions.
Will the SOL ETF pass?
I think the Solana spot ETF is less likely to pass. The main reasons are as follows:
- Lack of futures ETF : According to current norms, you first need to have a futures ETF, and then you can apply for a spot ETF. However, Solana does not currently have a futures ETF, which means it still has a long way to go.
- Not enough decentralization : Solana is not as decentralized as Bitcoin and Ethereum. In particular, FTX previously held a large amount of Solana, which increased the risk of its concentration. If the FIT21 bill continues to emphasize the value of decentralization in the future, Solana may be deemed not decentralized enough and thus be deemed a security.
- Market Cap Issue : Solana’s market cap is significantly different compared to Bitcoin and Ethereum. A smaller market capitalization means less market depth and liquidity, which could impact SEC approval of its ETF application. Similarly, Hong Kong chose larger market capitalization Bitcoin and Ethereum over Solana when determining which cryptocurrencies retail investors could trade.
Based on the above points, I think it is unlikely that the Solana spot ETF will pass in the near future, or even become a reality throughout the cycle. Current expectations are more market speculation, but the likelihood of actual adoption is low.
Why Hong Kong ETFs collapsed so much
First of all, there is a significant gap between the size of Hong Kong's financial market and the 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 Hong Kong's financial market, mainly from mainland China, and these funds are currently unable to invest in Hong Kong's cryptocurrency ETFs. Therefore, the source of funds for Hong Kong cryptocurrency ETFs is limited, and the trading volume is naturally difficult to compare with that of U.S. cryptocurrency ETFs.
If southbound funds from mainland China are allowed to invest in virtual currency ETFs in Hong Kong in the future, the amount of market funds may increase, but for now this restriction still exists. In addition, Hong Kong's ETFs face process and fee disadvantages in attracting investors. For example, some of the U.S. ETF holders are Hong Kong hedge funds and other global institutions. These institutions prefer to buy more advantageous U.S. ETFs rather than Hong Kong ETFs.
Hong Kong ETFs must provide better advantages than US ETFs, otherwise investors would prefer to buy US ETFs. Hong Kong ETFs have higher handling fees and a relatively small market, making it difficult to compare with their U.S. competitors. Leaders in the U.S. 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 Chinese funds in Hong Kong to match.
Therefore, the dismal performance of Hong Kong cryptocurrency ETFs can be attributed to market size , funding source constraints , process and fee disadvantages , and the competitiveness gap with US ETFs . Future development still depends on whether the financial interaction between mainland China and Hong Kong can be further strengthened, thereby bringing more capital and market opportunities.
Which project are you optimistic about and involved 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 you need to be aware of the risks. Although the yield rate of stablecoins is good, there is always the lingering shadow of the previous Luna incident, so you can participate in the short term, but always be cautious.
Ethena's ENA token mechanism is very interestingly designed. It guides investors' behavior through an incentive mechanism. For example, some people are willing to pledge, and some are willing to provide liquidity. This diversified investment behavior can maintain the overall return rate, rather than relying solely on staking.
I remain hopeful about the future of Ethereum. The infrastructure of Ethereum is already very complete, and the second-layer network has also solved many bottlenecks in ecological development, such as handling fees and transaction processing speed. I believe that future innovation may occur on Ethereum’s second-layer network.
