Solana ETF Approval Prospects: From "Almost Hopeless" to "Expected Before the End of 2025", What Are the Current Challenges?

Although Solana lacks the support of a mature futures market and faces potential obstacles of being classified as a security, its ETF application process is steadily progressing in the expectation of a new regulatory environment.

Author: Weilin, PANews

The Cboe BZX Exchange recently filed applications for four Solana ETFs. With the US presidential election over and Donald Trump set to take office, SEC Chairman Gary Gensler's announcement of his resignation in January 2023 has created new opportunities for the approval of Solana ETF, as the regulatory environment for cryptocurrency ETFs is expected to undergo significant changes.

Analysts believe that the SEC will shift from a "enforcement-based" to a "disclosure-based" regulatory model, and if the Solana ETF is approved, it will stimulate huge demand in the cryptocurrency ETF market. Although Solana, the fourth-largest cryptocurrency by market capitalization, lacks the support of a mature futures market and faces potential obstacles of being classified as a security, its ETF application process is steadily progressing in the expectation of a new regulatory environment.

Four Institutions Compete to Apply for Solana ETF, Previously "Almost Impossible"

On November 22, Cboe BZX Exchange filings showed that the exchange has proposed to list and trade four Solana ETFs on its platform. These ETFs are sponsored by Bitwise, VanEck, 21Shares, and Canary Funds, and are classified as "commodity-based trust shares" filed under Rule 14.11(e)(4). If the SEC formally accepts the applications, the final approval deadline is expected to be in early August 2025.

In addition to Bitcoin and Ethereum, the following cryptocurrencies are also awaiting ETF approval:

• XRP ETF: Canary Capital, Bitwise, and 21Shares have submitted applications.

• Solana ETF: Canary Capital, 21Shares, Bitwise, and VanEck are seeking approval.

• Litecoin ETF: Canary Capital has submitted an application.

• HBAR ETF: Canary Capital has submitted an application.

ETF Store President Nate Geraci stated on November 21 that there are reports that at least one issuer has also attempted to apply for an ADA (Cardano) or AVAX (Avalanche) ETF.

Currently, some industry insiders believe that the chances of Solana ETF approval are higher than other ETFs.

However, just three months ago, there were public reports indicating that CBOE had removed the 19b-4 applications for two potential Solana ETFs from the "Pending Rule Changes" page on its website. At the time, Bloomberg ETF analyst Eric Balchunas commented that after Cboe removed the 19b-4 application for the Solana ETF from its website, the Solana ETF had almost no chance of being approved. But the current regulatory environment may bring about significant changes.

Expected Regulatory Changes: SEC to Return to a Disclosure-Based Regulatory Approach

After the US presidential election, the president-elect Trump and the most crypto-friendly Congress in history are about to take office. And SEC Chairman Gary Gensler, who has been critical of the crypto industry, will resign on January 20, 2025, bringing more optimism to crypto supporters.

Nate Geraci, president of ETF Store, said he believes that by the end of next year, a Solana ETF is very likely to be approved. "It appears the SEC is communicating with the issuer on this product, which is clearly a positive signal."

Alexander Blume, CEO of Two Prime Digital Assets, agreed with this view, saying that if the issuer was not very confident of success, they would not waste time and money on this.

Matthew Sigel, head of digital asset research at VanEck, the first to apply for a Solana ETF, said, "It was the SEC under Gary Gensler's leadership that broke from the long-standing rule-based traditional process and regulated through enforcement. Returning to a regular system based on disclosure will bring more possibilities for innovation. I think the chances of launching a Solana ETF by the end of next year are very high."

However, in contrast to VanEck's optimistic attitude, Robert Mitchnik, head of the digital assets division at BlackRock, the largest Bitcoin ETF, said the company has little interest in crypto products other than Bitcoin and Ethereum.

On January 20th, Gensler will step down as SEC Chairman, which is also the day of Trump's inauguration. Recently, these news have repeatedly boosted the crypto market, with Bitcoin price continuing to hit new highs in the process of challenging the $100,000 mark.

Data shows that the SEC set a record in fiscal year 2024, bringing 583 enforcement actions and obtaining $8.2 billion in financial remedies, the highest amount in SEC history. Compared to 2023, this represents a 14% increase in enforcement actions. Cases involving cryptocurrencies, private funds, and other high-risk financial misconduct are a priority for the agency. Now, Gensler's resignation is expected to turn the tide of crypto regulation.

The aforementioned Alexander Blume said, "By accessing cryptocurrencies through ETFs via regulated traditional financial channels like banks and exchanges, institutional and retail investors will be able to tap into a pool of funds that did not previously exist. This is like replacing a (small) swimming pool pipe with a (large) fire hose, meaning the potential market momentum could be amplified, and speculative trading could also have a greater impact."

Solana's Growth Momentum is Strong, but What Potential Application Challenges Does it Face?

Boosted by the meme rally, Solana has seen significant growth this year. Solana's native token SOL broke through its previous all-time high of $259.96 set at the end of 2021, reaching $263.83 on November 23, with a market cap of $121.1 billion, making it the fourth largest cryptocurrency.

What obstacles will the Solana ETF application face? Looking back at the previous Ethereum ETF application, in the approval statement for the Ethereum ETF, the SEC used an analytical framework called the "Ark Analysis Test" provided and adopted by Ark Fund. This framework listed several key reasons why the Ethereum ETF was ultimately approved: First, the existence of futures trading - the approval of a spot ETF must be based on a mature futures trading market, especially an officially recognized exchange like the CME (Chicago Mercantile Exchange). Secondly, the deviation between the futures ETF price and the spot price cannot be too large. This proves that the market will not be manipulated due to the spot ETF. In addition, a certain degree of market maturity is also required. Futures ETFs have been operating for some time and have shown stable performance, further supporting the maturity and stability of the spot market.

Rob Marrocco, Vice President of CBOE and Head of Global ETF Listings, pointed out that the only viable way to bring a Solana ETF to market is to first launch a Solana futures ETF, and then pave the way for a spot ETF. He further stated that even if a Solana futures ETF is launched, they will need to establish a track record through trading for a period of time, a process that could be very long, and it may ultimately take a significant amount of time to complete.

Although Bitcoin ETFs and Ethereum ETFs have been approved, they have a major difference from Solana: Bitcoin and Ethereum are traded in futures on the regulated Chicago Mercantile Exchange (CME), which the SEC can monitor. But Solana was listed as one of the 19 unregistered securities in the SEC's 2023 lawsuit against Binance and Coinbase Global Inc., which also poses a legal obstacle to the approval of a Solana ETF.

Nevertheless, as mentioned earlier, Matthew Sigel, head of digital asset research at VanEck, pointed out that VanEck believes Solana (SOL) is a commodity, similar to Bitcoin (BTC) and Ethereum (ETH). This view is based on the evolving legal perspective, where courts and regulators have begun to recognize that certain crypto assets may behave as securities in the primary market, but more like commodities in the secondary market.

Sigel further mentioned that over the past year, Solana has made significant progress in decentralization; the top 100 holders now control about 27% of the supply, a significant decrease from a year ago. The top 10 addresses now hold less than 9% of the supply. Solana has over 1,500 validator nodes distributed across 41 countries, operating over 300 data centers, and its Nakamoto Coefficient is 18, exceeding most networks it monitors. The upcoming Firedancer client will further enhance decentralization, ensuring that no single entity can dominate the blockchain. He believes these developments make Solana's decentralization characteristics more pronounced, more akin to digital commodities like Bitcoin and Ethereum.

Sigel also mentioned a key legal precedent - the 2018 CFTC v. My Big Coin case. In this case, the defense of MBC argued that the token did not qualify as a commodity because there were no futures contracts associated with it. However, the U.S. District Court disagreed, ruling that under the Commodity Exchange Act (CEA), the definition of a commodity is very broad, encompassing all goods, articles, services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.

Sigel believes this precedent may apply to Solana, indicating that even without futures contracts, it can still be considered a commodity. This classification is crucial for the approval of a Solana ETF, as it provides a legal basis for Solana to be classified as a commodity, allowing it to enter the approval process for commodity-based ETFs.

Therefore, he stated that ETF approval does not necessarily require an active futures market. Although the trading volume of the relevant futures market is not large, ETFs for commodities like shipping, energy, and uranium already exist. "We believe it can be approved even without a CME futures contract. He stated that exchanges can substitute market surveillance sharing agreements in place of a futures market.

If approved, the next question is how much demand there will be for a spot Solana ETF. Grayscale Investments already operates the Grayscale Solana Trust, currently managing assets of around $70 million. Bloomberg analyst James Seyffart believes that since Solana's market cap is about 6% of Bitcoin's, the demand for this ETF will grow proportionally, and is expected to ultimately reach around $3 billion.

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