Hotcoin Research | Will the SOL ETF be the third approved cryptocurrency asset ETF? A hype or a sure win?

Introduction

The U.S. Securities and Exchange Commission (SEC)'s 180-degree shift in attitude towards Ethereum spot ETFs has given the market more hope for the approval of crypto asset ETFs. According to industry insiders, at least three asset management companies will begin trading Ethereum spot ETFs starting July 23. The market is beginning to focus on the potential for the next wave of crypto asset ETFs, with Solana (SOL) being considered highly likely to be the third crypto asset ETF approved after Bitcoin and Ethereum spot ETFs, sparking widespread discussion. This article will analyze the application process for the SOL ETF, favorable and unfavorable factors, the likelihood of SEC approval, and future prospects.

1. Market Performance of Bitcoin Spot ETFs

The approval process for Bitcoin spot ETFs has been long and winding. On January 11, 2024, BlackRock launched the world's first Bitcoin spot ETF (IBIT), marking the official entry of Bitcoin spot ETFs into the mainstream financial market. The launch of IBIT not only provided investors with a regulated investment channel but also significantly enhanced market trust in Bitcoin.

The market performance of Bitcoin spot ETFs has been impressive, with rapid inflows of funds. As of July 16, the total net asset value of Bitcoin spot ETFs reached $56.72 billion. According to BlackRock's second-quarter financial report released on July 15, as of June 30, assets managed by BlackRock reached $10.65 trillion, with net inflows of $139 billion in the first half of this year. Since the launch of IBIT on January 11, 2024, BlackRock has become the largest Bitcoin spot ETF globally. IBIT currently holds 316,276 Bitcoins, valued at approximately $18.3 billion.

The issuance and impressive performance of Bitcoin spot ETFs have laid a solid foundation for the future development of crypto asset ETFs. The success of Bitcoin ETFs not only demonstrates strong market demand for Bitcoin but also showcases the potential of crypto asset ETFs to attract investors and drive market growth, providing strong support for the launch of other crypto asset ETFs.

2. Progress of Ethereum Spot ETFs

Following the success of Bitcoin spot ETFs, market attention gradually shifted to Ethereum spot ETFs. On May 23, the SEC approved the 19-b form submitted by the issuer, allowing Ethereum spot ETFs to be traded on U.S. exchanges, marking the first step towards the issuance of Ethereum spot ETFs. A total of eight asset management companies are vying for the approval of Ethereum ETFs, including BlackRock, Grayscale, Fidelity, ARK 21Shares, Invesco Galaxy, VanEck, Hashdex, and Franklin Templeton.

According to Reuters, three industry insiders stated that the SEC has preliminarily approved at least three asset management companies to begin trading Ethereum spot ETFs starting July 23, and it is likely that approval will be granted on the afternoon of July 22, with related products expected to start trading the following day.

Analysts expect that Ethereum spot ETFs will generate significant interest from investors and could attract up to $10 billion in new inflows within a few months of launch. Tom Dunleavy, managing partner at MV Global, predicted, "We saw inflows for Bitcoin reach $15 billion, and I believe inflows for Ethereum ETFs could be between $5 billion and $10 billion."

Compared to Bitcoin ETFs, Ethereum's market performance has seen an increase, but it has not yet reached its previous market cap highs. However, the launch of Ethereum ETFs remains an important milestone for the market, providing a reference for future applications for more cryptocurrencies.

3. The Beginning of the SOL ETF Application

With the successive approvals of Bitcoin spot ETFs and Ethereum spot ETFs, the market's attention has gradually turned to Solana (SOL) ETFs.

On June 28, VanEck and 21Shares announced that they had submitted S-1 applications for Solana ETFs to the SEC, with VanEck even issuing an open letter to explain the initiative. There are also reports that BlackRock may also be applying for a SOL ETF.

On July 8, 2024, the Chicago Board Options Exchange submitted a 19b-4 filing to the SEC, with VanEck and 21Shares planning to list and issue Solana spot ETFs. The submission of this document marks the formal entry of the SOL ETF into the approval process. According to regulations, the SEC must respond to the 19b-4 filing submitted by the Chicago Board Options Exchange within 240 days (expected by March 2025).

Since the application news broke, the SOL market has shown positive performance. On June 28, the SOL price rose by 7%, and on July 8, when the 19b-4 filing was submitted, the SOL price rose again by 8%. This indicates market expectations and optimism for the SOL ETF.

4. Favorable Factors for SOL ETF Approval

4.1 Technical and Application Advantages

The Solana blockchain employs a unique Proof-of-History (PoH) consensus mechanism, enabling it to handle a higher transaction throughput with extremely low transaction fees. The high performance and low cost of SOL give it a competitive edge in decentralized finance (DeFi) and non-fungible tokens (NFTs), making it an attractive investment target.

4.2 Strong Market Demand

As one of the top five crypto assets by market capitalization, SOL has broad market demand and sufficient market depth, making it a potential candidate for ETF issuance. The SOL ETF will attract investors interested in emerging crypto assets, providing diversified investment options beyond just Bitcoin and Ethereum products.

4.3 Institutional Support and Investor Interest

The application for the SOL ETF has received support from several institutional investors, including VanEck and 21Shares. The participation of these institutions demonstrates the market's high trust and expectations for SOL. Institutional investor support is a significant driving force behind the approval of the SOL ETF.

4.4 Promotion by the FIT21 Act

On May 22, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT21) with a vote of 279 to 136, showing strong political support and increasing the likelihood of the bill becoming law. The FIT21 Act aims to amend existing securities and commodities regulations to establish a clear regulatory framework for digital assets. The bill defines the regulatory authority of the CFTC and SEC, clarifying that decentralized tokens are digital commodities regulated by the CFTC, while non-decentralized tokens are securities regulated by the SEC. This classification helps resolve existing regulatory disputes and clears obstacles for ETF applications for crypto assets like SOL.

5. Unfavorable Factors for SOL ETF Approval

5.1 Regulatory Challenges and Legal Risks

The SEC has classified SOL as a security in several lawsuits, posing significant obstacles to the approval of the SOL ETF. In previous lawsuits against Coinbase, Kraken, and other companies, the SEC has explicitly stated that SOL is a security. In the U.S., securities must meet a series of strict regulations and disclosure requirements, increasing the compliance costs and complexities for the SOL ETF. In the aforementioned lawsuits, 18 tokens, including BNB, BUSD, ADA, MATIC, ATOM, FLOW, and ICP, were also classified as securities, making it unlikely for these tokens to obtain ETF approval in the short term.

5.2 Lack of SOL Futures Market

Both Bitcoin ETFs and Ethereum spot ETFs were approved in the context of existing futures markets, where their futures ETFs had been operating for some time and demonstrated stable performance, further supporting the maturity and stability of the spot market. In contrast, SOL lacks a futures market. Jake Chervinsky, Chief Legal Officer at Variant Fund, stated, "I suspect the SEC will reject the SOL ETF application due to the lack of a futures market." Hasseb Qureshi, a partner at Dragonfly Capital, added that there are better reasons to demonstrate that BTC and ETH-based ETFs meet the SEC's market surveillance requirements because the trading markets for these assets are already well-developed, but without a listed futures market, the market surveillance standards cannot be met.

5.3 Decentralization and Transparency Issues

Solana's level of decentralization is not as high as that of Bitcoin and Ethereum. Particularly, the previous significant holdings of Solana by FTX increased its centralization risk. The FIT21 Act distinguishes between securities-class cryptocurrencies and commodity-class cryptocurrencies. Securities-class cryptocurrencies fall under SEC jurisdiction, while commodity-class cryptocurrencies fall under CFTC jurisdiction. The classification is based on the degree of decentralization of the cryptocurrency itself, defined as: no one can control the entire blockchain network alone, and no one owns more than 20% of the digital assets or voting rights.

5.4 Market Competition and Liquidity Risks

Bitcoin is viewed as digital gold and a store of value, while Ethereum has become synonymous with blockchain technology due to its widespread use of smart contract platforms. In contrast, SOL, as a newer digital asset, has relatively low market recognition and trust. Investor confidence and participation are relatively insufficient, which may affect the market performance of its ETF. Although SOL ranks high in market capitalization, its market depth and trading volume are still far behind Bitcoin and Ethereum. This means that the SOL ETF may face liquidity issues, especially during periods of high market volatility, making it more susceptible to price manipulation and severe fluctuations.

6. Impacts of Solana ETF Approval

6.1 Direct Impact on the Solana Ecosystem

The launch of the SOL ETF will overall promote the development of the Solana ecosystem, with more funds flowing into the Solana ecosystem, facilitating the development of new projects and the expansion of existing ones. This will attract more developers and investors, further enhancing Solana's competitiveness in the blockchain space.

Tokens within the Solana ecosystem are expected to experience significant upward trends. This upward trend will not only affect SOL itself but will also impact other tokens within the Solana ecosystem.

6.2 Impact on the Cryptocurrency Market

More crypto asset ETFs will be launched: The introduction of the SOL ETF will stimulate enthusiasm among other crypto assets to seek ETF approval, further enriching the investment products in the cryptocurrency market. The market will see more types of cryptocurrency ETFs emerging, promoting market competition and innovation. The launch of new cryptocurrency ETFs will provide investors with more choices, enhancing market liquidity and activity.

Market volatility and investment risks: Although the approval of the SOL ETF will bring positive impacts, it may also trigger market volatility and investment risks. The cryptocurrency market itself is highly volatile, and the launch of the SOL ETF may further amplify this characteristic, especially during significant shifts in market sentiment.

6.3 Impact on Legal and Regulatory Frameworks

The approval of the Solana ETF will prompt regulatory agencies to further refine the regulatory framework for digital assets. If the FIT21 Act ultimately becomes law, it will establish clear regulatory standards for digital assets, further promoting the legalization and normalization of the cryptocurrency market and fostering healthy development in the crypto industry. An increasing number of institutional investors entering the cryptocurrency market through ETF products will help enhance overall market trust and transparency. This will attract more traditional investors into the cryptocurrency market, expanding market size and depth.

7. Assessment of the Likelihood of Solana ETF Approval and Future Prospects

In the short term, the SOL ETF still faces uncertainties. Although SOL has significant advantages in technology and application and has received support from institutional investors, challenges related to its security classification disputes, market recognition, liquidity, decentralization, and transparency still need to be overcome. In the future, as the FIT21 Act progresses and the political environment changes, the approval process for the SOL ETF will become clearer. The SEC needs to respond to the SOL ETF application within the next 240 days. Future regulatory trends and market reactions will be key factors influencing the success or failure of the SOL ETF.

With the upcoming U.S. presidential election, the political impetus behind the approval of the SOL ETF cannot be overlooked. Both the Republican and Democratic parties are actively seeking the votes of cryptocurrency supporters. Both Trump and Biden have expressed varying degrees of support for cryptocurrencies. Trump has publicly pledged to protect the future of Bitcoin and cryptocurrencies and has stated his intention to prevent the Biden administration from cracking down on cryptocurrencies. Although the Biden administration initially took a hardline stance, it has gradually shown a more lenient attitude towards cryptocurrency regulation. The public support from Trump and the policy adjustments from Biden indicate that regardless of who wins, the cryptocurrency industry may benefit.

In summary, under the current political environment and with the support of the FIT21 Act, the approval of the SOL ETF has a certain likelihood, but challenges related to regulatory compliance and market recognition must be overcome. Regardless of the final outcome, the application for the SOL ETF has already opened new market discussions and provided valuable experience and references for the future launch of more crypto asset ETFs.

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