How can Ethereum ETFs be approved? What the market should really focus on is..

Author: BitPush Asher Zhang

On May 24, the U.S. Securities and Exchange Commission (SEC) documents revealed that the SEC approved the 19B-4 forms for spot Ethereum ETFs from several issuers, including BlackRock, Fidelity, and Grayscale. Former SEC Chairman Jay Clayton stated that the approval of the Ethereum ETF is a two-step process (Note: the SEC still needs to approve the S-1 form), and while it has received listing approval, the product's approval is still pending. Although there are still some issues to resolve, such approvals are inevitable.

In a sense, the Ethereum ETF has essentially been approved. This viewpoint was accurately predicted in our article "Is the Ethereum ETF Coming? Observing the Game Between Wall Street and the SEC" prior to the approval of the Ethereum ETF, where we analyzed the underlying reasons in depth. However, many in the market are still puzzled by the approval of Ethereum and are overly immersed in this event, neglecting a more important matter. This article will further delve into the complex relationships behind this and explore the future market developments and impacts on Ethereum.

Starting from the Fundamental Reasons for Ethereum's Approval

An important event for the crypto industry has been somewhat overlooked due to the approval of the Ethereum ETF, and many are confused about Ethereum's approval, not realizing it is precisely because of this oversight. So, let's start with the fundamental reasons for Ethereum's approval.

In our article "Is the Ethereum ETF Coming? Observing the Game Between Wall Street and the SEC," we identified two reasons why we believed Ethereum would be approved: 1) The SEC and Wall Street found a "balance point" regarding Ethereum's approval—there are no staking provisions in the Ethereum ETF; 2) However, the first reason is not perfect; essentially, political reasons prompted the SEC to ultimately accept this compromise.

The FIT21 Act, formally known as the "21st Century Financial Innovation and Technology Act," was passed by the U.S. House of Representatives on May 23, with a vote of 279 in favor and 136 against, showing strong support from House Democrats. The FIT21 Act is essentially pushed forward through the joint efforts of the House Financial Services Committee (which oversees the SEC) and the House Agriculture Committee (which oversees the Commodity Futures Trading Commission). This act will establish a regulatory framework for crypto regulation in the U.S., which is significant, and we will discuss this in more detail below.

The FIT21 regulatory bill involves many aspects, but we will first focus on one point relevant to this article—the boundaries of crypto regulation. In the U.S., the lines between the SEC and the Commodity Futures Trading Commission (CFTC) regarding who regulates cryptocurrencies have always been unclear, with Ethereum being the most contentious. The CFTC considers both Ethereum and Bitcoin as commodities, which is why Bitcoin and Ethereum futures were launched early on. For Bitcoin, the SEC has little dispute over its asset attributes, only considering it potentially manipulated, which has been the reason for the delay in launching a Bitcoin spot ETF. However, regarding Ethereum, SEC officials have long believed that its transition to a POS mechanism classifies it as a security, which is why the Ethereum spot ETF has not been launched.

However, the FIT21 Act / HR 4763 clarifies which digital assets are regulated by the CFTC and which are regulated by the SEC. The CFTC will regulate digital assets as commodities "if the blockchain or digital ledger it operates on is functional and decentralized." The SEC will regulate digital assets as securities "if the related blockchain is functional but not decentralized." The act defines decentralization as "among other requirements, no one has unilateral control over the blockchain or its use, and no issuer or affiliate controls 20% or more of the digital asset or its voting rights." From this definition, Ethereum is a commodity, thus invalidating the SEC's previous classification of Ethereum as a security. On May 23, the FIT21 Act passed in the House; on May 24, the Ethereum ETF was approved, making the causal relationship clear.

The Far-Reaching Impact of Ethereum ETF Approval

The approval of the Ethereum ETF will not only affect the development of Ethereum but will also have a profound impact on the crypto industry. Here, we will briefly discuss the potential balance reached between the SEC and Wall Street.

In February of this year, VanEck submitted a revised S-1A filing to the SEC that did not include staking provisions; in recent days, Fidelity and Grayscale have successively removed the staking portions from their S-1 registration statements and resubmitted documents to the SEC. Therefore, we speculate that this "balance point" is: if ETH in the ETF is not staked, then Ethereum does not fall under the category of securities; conversely, Ethereum used for staking will be defined as a "security." For this reason, the market believes that other mainstream cryptocurrencies are likely to have opportunities to launch spot ETFs, with SOL being the most favored, meaning that if Ethereum can, why not SOL, which also uses a PoS mechanism? This viewpoint in the market sounds reasonable at first glance, but the SEC has many reasons, such as manipulation and trading fraud. For example, Ethereum's sufficient decentralization (after all, Ethereum has been around for a long time). To speculate that other mainstream cryptocurrencies will follow Ethereum's approval is, in fact, a short-term assumption that other mainstream assets should not quickly launch new spot ETFs.

However, this article maintains a relatively positive attitude. This is mainly due to the FIT21 Act, as it is the true legislation that will influence the future direction of mainstream crypto assets. The smooth passage of the FIT21 Act in the House is largely due to strong support from the Democrats. If the Democrats win the U.S. elections this year, it is highly likely that the SEC chair will be replaced by someone from the Democratic Party, who may vigorously promote the forward development of the crypto industry. In addition, this article believes that the U.S. has a relatively obvious advantage in the AI field, making its overall national policy more inclusive and open to technological innovation, thereby ensuring its overall technological leadership, which will undoubtedly benefit the high-tech crypto industry.

How Will Ethereum's Market Develop in the Future?

On May 24, crypto influencer Shen Yu stated that based on the experience of the BTC ETF and public market information, the timeline for the ETH ETF is as follows: May 23: ETH 19B4 unexpectedly passed, market makers began purchasing ETH spot to prepare for liquidity; early June: S1 may pass. Referring to the BTC ETF, the fastest would take 2 weeks, but the normal pace may take 3 months; mid-June: After S1 passes, trading may begin immediately or within a few days; June to December: In the early stages of listing, the main influx of funds may come from retail investors, accounting for 80-90% of total funds; institutional participation is relatively low. Considering that ETHE is similar to GBTC, the market may face some arbitrage and selling pressure, and whether it can withstand this selling pressure remains to be seen; after December: As time goes on, institutional investors may gradually enter the market.

This article believes that the trend of Ethereum will undoubtedly be stronger after the approval of the Ethereum ETF, mainly due to increased demand, but it will not simply replicate the path of Bitcoin's ETF approval. The main difference lies in macro factors. At the beginning of the year, when the Bitcoin ETF was approved, the market actually expected the Federal Reserve to start cutting interest rates in June, coupled with strong expectations for a bull market after Bitcoin's halving, which significantly boosted Bitcoin's price. Although Ethereum has not performed as strongly this year, its increase has still been relatively high. In the future, its trend will more likely follow Bitcoin's trend, which in turn needs to closely monitor changes in the Federal Reserve's policies.

However, the overall market currently holds an optimistic view on Ethereum's future. Geoff Kendrick, Head of Foreign Exchange Research and Digital Asset Research at Standard Chartered Bank, stated that he expects the approval of the Ethereum spot ETF to drive 2.39 to 9.15 million Ethereum inflows within the first 12 months. In dollar terms, this is approximately equivalent to $15 billion to $45 billion. The year-end target price for Ethereum is $8,000, and by the end of 2025, Ethereum's price will reach $14,000.

Bernstein analysts estimate that the approval of the spot Ethereum ETF will drive its price up by 75% to $6,600. The SEC approved a similar Bitcoin product in January, which stimulated a 75% increase in Bitcoin's price in the following weeks, and ETH's price trend is expected to be similar. Nick Forster, founder of Lyra and former Wall Street options trader, stated: "According to indications from the Lyra options market, the probability of Ethereum reaching $5,000 before June 28 is about 20%, and the probability of exceeding $5,500 before July 26 is also 20%."

Conclusion

This article believes that the approval of the Ethereum ETF is due to the SEC and Wall Street finding a balance point; and this is also due to the shift in U.S. policy, primarily the FIT21 Act. Although the FIT21 Act was mainly pushed by the Democrats, this article believes it is closely related to the shift in U.S. national policy. Alongside the continued leadership of OpenAI, Google, and Nvidia in the AI field, this has kept the U.S. economy resilient, which, while making the Federal Reserve less eager to cut interest rates, has also led U.S. policymakers to become more open, inclusive, and encouraging of innovation in high-tech sectors, particularly in the blockchain industry closely related to AI. This will undoubtedly accelerate the rapid development of the blockchain industry, and the prosperity of the crypto industry may be on the horizon.