In this episode, Colin, the founder of Wu Blockchain, and his old friend, lawyer Dongbing, discuss the sudden approval of the Ethereum spot ETF this week and explore the reasons behind this major shift. We also delve into the significant FIT21 bill and its potential impact on the industry. Winter Soldier predicts that Ethereum’s price could rise to 6K to 8K during this cycle. We generally believe that the SOL ETF is unlikely to be approved in this cycle.

The audio transcription was done using GPT and may contain errors. Listen to the full podcast: YouTube

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Reasons for the Sudden Approval of the ETH Spot ETF

This event can be traced back to the approval of the Bitcoin ETF in January of this year. After the Bitcoin ETF was approved, I believed that the Ethereum ETF would inevitably be approved. Why? Because after the Bitcoin ETF approval, the US SEC released a statement detailing the reasons and analytical framework for approving the Bitcoin spot ETF, laying the policy foundation for all future cryptocurrency ETF applications.

In the statement, the SEC used an analytical framework called the Ark Test, provided and adopted by the Ark Fund. This framework outlined several key reasons:

1. Existence of Futures Trading: The approval of a spot ETF must be based on a mature futures trading market, particularly one recognized by official exchanges like the CME (Chicago Mercantile Exchange).

2. Small Price Deviation: There should be minimal price deviation between the futures ETF and the spot prices, proving that the market would not be manipulated due to the spot ETF.

3. Market Maturity: The futures ETF should have been running for a while and demonstrated stable performance, further supporting the maturity and stability of the spot market.

These factors collectively form the basis for approving a spot ETF. Previously, the SEC rejected all spot ETFs due to concerns about price manipulation. However, if there is no significant price deviation between the futures ETF and spot prices, the SEC can assume there is no market manipulation risk and approve the spot ETF.

In summary, the approval of a spot ETF requires meeting two key conditions: a mature futures trading market and stability between spot and futures prices. Based on these conditions, the SEC believes that the spot market will not be manipulated, hence approving the Ethereum spot ETF. This is why the Ethereum spot ETF was approved shortly after the Bitcoin ETF.

Political Struggles Behind the Approval

The SEC’s documents included extensive discussions on the correlation between CME futures ETFs and spot trading platforms. They conducted a 90-day rolling correlation analysis, finding a high correlation, further validating my previous prediction that the Ethereum ETF approval was likely.

Ethereum and Bitcoin both have trading on the CME, and the SEC has already approved the Bitcoin spot ETF. If the SEC approved the Bitcoin spot ETF but rejected the Ethereum spot ETF, it would revisit the Grayscale lawsuit against the SEC, where the SEC faced criticism for inconsistent enforcement and was likely to face legal challenges. Moreover, US courts would probably not support such inconsistent enforcement, especially given the SEC’s previous loss in the Grayscale case.

Therefore, the SEC cannot use rigid reasons to reject the Ethereum spot ETF. However, many still doubt the approval of the Ethereum spot ETF, largely due to political considerations. This year, there has been a clear division between Republicans and Democrats on cryptocurrency issues, reflected in their voting on the Bitcoin spot ETF.

After the Bitcoin spot ETF was successfully approved, some policymakers opposed to cryptocurrencies might pressure the SEC to delay the approval of a second cryptocurrency spot ETF. However, from a legal perspective, the SEC lacks sufficient reasons to directly reject the Ethereum spot ETF. They could technically delay the approval, citing the shorter duration since the futures ETF’s approval, needing more time to observe the differences between futures ETF and spot prices.

Unexpectedly, the SEC approved the Ethereum spot ETF by the May 23 deadline, surprising most people. Many expected the SEC to delay the approval until the end of the year or even next year, but it was approved quickly. This approval’s reason might be linked to the recent FIT21 bill.

The FIT21 bill received overwhelming support in the House, addressing the longstanding jurisdictional dispute between the SEC and CFTC over cryptocurrency regulation. This bill’s passage was crucial for the SEC’s approval of the Ethereum spot ETF.

Since Gensler took office, this regulatory struggle has intensified. He claims to understand cryptocurrencies well and aims to gain regulatory authority over them. Meanwhile, the CFTC has also shown significant interest in cryptocurrencies, doing considerable work. Ethereum falls into a gray area between the SEC and CFTC, with the SEC considering it under its jurisdiction and the CFTC viewing Bitcoin and Ethereum as commodities. Thus, there is a power struggle between the two agencies.

If the FIT21 bill passes, this jurisdictional dispute will be resolved, and the SEC will no longer have the authority to regulate Ethereum as a security.

What Does the FIT21 Bill Specify, and How is Decentralization Defined?

The core of the FIT21 bill is to distinguish between securities and commodity cryptocurrencies. Securities cryptocurrencies fall under the SEC’s jurisdiction, while commodity cryptocurrencies are regulated by the CFTC. The division is based on the cryptocurrency’s decentralization level, with a critical factor being the distribution of holders. If a large holder owns more than 20% of the tokens, it is considered not decentralized enough and may be classified as a security. Otherwise, it is classified as a commodity and regulated by the CFTC.

Ethereum’s decentralization is relatively high, so according to this standard, it should not fall under the SEC’s jurisdiction. In this case, the SEC, aware of the House’s voting tendencies and outcomes, chose not to resist needlessly but rather to follow the trend and quickly approve the Ethereum spot ETF. This can be seen as a 180-degree turn, avoiding unnecessary entanglement.

Additionally, some mainstream analyses suggest that Trump’s support for cryptocurrencies may have influenced the Biden administration’s attitude. Trump stated in his speeches that if you hold cryptocurrencies, you should support him, while Biden was mocked for possibly not even knowing what cryptocurrencies are. Such provocative statements might have affected the Biden administration’s policies and attitudes.

During a bull market, many people hold positive views on cryptocurrencies, especially young voters who hope for more open policies. Although the FIT21 bill still needs Senate approval and Biden’s signature, the Biden administration’s statements about the bill have become much milder. This attitude change may also have influenced the SEC’s approval of the Ethereum spot ETF.

Regarding the success of the Bitcoin ETF, its fund inflows exceeded expectations, pushing Bitcoin prices to new highs. Currently, the Bitcoin ETF’s fund size has reached $50 billion, and it is expected to reach $100 billion soon, accounting for 1% of US assets under management.

How High Could Ethereum’s Price Rise?

I prefer to look at the Ethereum and Bitcoin exchange rate to address this question. In the last cycle, after Ethereum’s DeFi revolution succeeded, it rapidly grew to become as important as Bitcoin in the cryptocurrency space. I do not consider Ethereum an altcoin; it is a core asset in the cryptocurrency ecosystem, just like Bitcoin.

At the end of 2021, the ETH/BTC price maintained a range of 0.06–0.08, similar to an anchoring state. However, recently this exchange rate dropped to around 0.04, mainly due to the expectations surrounding the approval of the Bitcoin spot ETF starting in October 2023, leading to a rapid decline in the ETH/BTC exchange rate.

But now, the Ethereum spot ETF is also set to be approved, leveling the playing field between the two. I predict the ETH/BTC exchange rate could return to its previous level of above 0.06. If Bitcoin reaches $100,000 in the future, Ethereum’s price reaching $6,000–8,000 is also possible.

Of course, this prediction is relatively conservative, and the actual outcome will depend on the macroeconomic trends. Currently, the macroeconomic environment appears favorable for the development of cryptocurrencies. Different people have varying views on Ethereum; some believe that Ethereum’s ecosystem and potential for innovation surpass Bitcoin. Thus, Ethereum could once again be seen as surpassing Bitcoin in the future due to its greater potential and innovation space, while Bitcoin remains relatively conservative.

Does Developer Control Affect the Definition of Decentralization?

The issue of developer control over chain updates has always been contentious within the community. The extent of control core developer teams have over a chain and their influence is a debated topic. From a legal perspective, it is challenging to address such deep issues. The focus is more on the distribution of token holders rather than developer control over technical decisions. Developers’ influence is often based on technical and community consensus rather than economic interests.

Currently, the bill is unlikely to discuss developer control. The primary focus remains on the distribution of holders. If a person or group of coordinated holders possesses a significant number of tokens, it would be considered not decentralized enough. However, influential community leaders are not necessarily seen as lacking decentralization.

Regarding voting rights, if the bill is strictly enforced, it would require a clear distribution of voting rights to ensure no individual holds more than 20% of the voting power. Otherwise, many tokens could face compliance issues, especially those with voting power concentrated in foundations or founding teams.

The passage of this bill could have profound implications for the entire cryptocurrency industry, setting clear rules similar to traditional finance and accounting. In the future, all cryptocurrency projects may need to adjust to meet decentralization standards.

Will the Ethereum Foundation Continue to be Investigated?

I believe the SEC is unlikely to continue investigating the Ethereum Foundation. Despite previous rumors of investigations, given the approval of the Ethereum spot ETF, the SEC may reevaluate its priorities. The situation with UnitSwap is different, as it involves exchange-related issues, so the SEC’s investigation might continue.

If Ethereum is considered to meet the new decentralization standards as a commodity cryptocurrency, the SEC has no reason to continue investigating it as a security. The FIT21 bill will provide clear jurisdictional boundaries for the SEC, which might focus on less decentralized cryptocurrencies.

Although the new bill may take time to pass, it has already sparked discussions on the SEC’s jurisdictional boundaries. Future regulatory policies may adjust, especially considering the differing stances of the two parties on cryptocurrency regulation.

The Democratic Party’s choice to suppress cryptocurrencies in the current market environment, opposing the Republican stance, could lose voter support. Cryptocurrency supporters are mostly young and concentrated in Silicon Valley and Wall Street, key Democratic constituencies. Thus, the Democratic Party might shift its stance 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 its past approach. The Senate’s passage of the bill is not unlikely, especially during a bull market when cryptocurrency supporters are more active, influencing future policy directions.

Will the SOL ETF Be Approved?

I believe the chances of the Solana spot ETF being approved are slim. The main reasons are:

1. Lack of Futures ETF: Current regulations require a futures ETF before applying for a spot ETF. Solana currently does not have a futures ETF, indicating a long road ahead.

2. Insufficient Decentralization: Solana’s decentralization level is lower than that of Bitcoin and Ethereum. Particularly, FTX previously held a large amount of Solana, increasing its centralization risk. If the FIT21 bill continues to emphasize decentralization, Solana might be seen as insufficiently decentralized and classified as a security.

3. Market Capitalization: Solana’s market capitalization is significantly lower than Bitcoin and Ethereum. A smaller market cap means less market depth and liquidity, affecting the SEC’s approval of its ETF application. Similarly, Hong Kong chose Bitcoin and Ethereum for retail trading due to their larger market caps, not Solana.

Based on these points, I believe the Solana spot ETF is unlikely to be approved soon, if at all, during this cycle. The current expectations are more market hype, with actual approval chances being low.

Why is the Hong Kong ETF So Underwhelming?

Firstly, Hong Kong’s financial market size is significantly smaller compared to US exchanges. The funds available in Hong Kong are much less than in the US. Additionally, a substantial portion of Hong Kong’s financial market consists of southbound funds from mainland China, which currently cannot be invested in Hong Kong’s cryptocurrency ETFs. This restriction further limits the funds available for Hong Kong’s cryptocurrency ETFs, resulting in lower trading volumes compared to US ETFs.

If, in the future, mainland Chinese southbound funds are allowed to invest in Hong Kong’s virtual currency ETFs, the market funds might increase, but this restriction remains for now. Furthermore, Hong Kong ETFs face procedural and fee disadvantages. Many large holders of US ETFs are hedge funds and other global institutions based in Hong Kong, which prefer purchasing US ETFs with better advantages over Hong Kong ETFs.

Hong Kong ETFs need to offer better advantages than US ETFs; otherwise, investors will prefer buying US ETFs. Hong Kong ETFs have higher fees and smaller markets, making it difficult to compete with US counterparts. Leading US market players like BlackRock and Fidelity have robust global sales and brokerage systems, holding many long-term clients, which Hong Kong’s funds cannot match.

Therefore, the underwhelming performance of Hong Kong’s cryptocurrency ETFs can be attributed to market size, funding restrictions, procedural and fee disadvantages, and the competition with US ETFs. Future development depends on whether financial interaction between mainland China and Hong Kong can be strengthened, bringing more funds and market opportunities.

What Projects Are You Currently Interested In or Involved With?

Recently, I have been involved in the Ethena stablecoin project, which I find quite interesting. Some of my friends are also participating in this project, but it’s essential to be cautious. Although the stablecoin yields are good, the shadow of the previous Luna incident lingers, so short-term participation is fine, but one should always be cautious.

Ethena’s ENA token mechanism is intriguing, using incentives to guide investor behavior. For instance, some are willing to stake, while others provide liquidity. This diversified investment behavior maintains overall yield rather than solely relying on staking.

I remain hopeful for Ethereum’s future. Ethereum’s infrastructure is very complete, and the second-layer network addresses many bottlenecks in ecosystem development, such as fees and transaction processing speed. I believe future innovations may occur on Ethereum’s second-layer network.

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