In many ways May, was a pretty boring month if one just looked at the markets. The Bitcoin Halving event was, not surprisingly, kind of a yawn fest (general history shows us movement begins 60 days after the halving, which puts us in July territory.). May 2024, however, may be remembered as one of the absolute seminal months in the history of crypto and blockchain. Here’s why:
Ethereum ETFs ASAP
In a sudden about face, the SEC – on basically no notice mind you and to the surprise of…. everyone – approved exchanges to list Ethereum ETFs on May 23 and also approved the 19B-4 forms for firms including BlackRock, Fidelity, Grayscale, Bitwise, VanEck, Ark, Invesco Galaxy and Franklin Templeton.
This was a stark and complete 180 to their position up to that point. Prior to this landmark announcement it looked like they were positioning to go after Ethereum on the grounds that it was security. In fact, that really was our main risk factor going into the next phase of these markets. Ethereum, if attacked as a security, would then open the door for many other competing Level 1 platforms to likewise be attacked. Conversely, listing Ethereum ETFs takes this off the table for Ethereum and likewise for it’s competitors and removes the widespread fear that the SEC would go after all tokens as securities.
The importance of this news simply cannot be overstated. We’re now operating in a place we never have been in the USA, with regulation not only getting out of the way, but with congress now working together to try to find some appropriate regulation for this industry. You see, up until now the US has been a boat-anchor while the rest of the world has been embracing these markets. Singapore, the UAE, Hong Kong (which means China is on the train), Japan and much of Asia is already there. Latin America countries are also exploring how to embrace this space and gain benefit from the technological leap it will give them. Meanwhile in Europe, legislation is taking hold. Specifically, the Markets in Crypto Assets (MiCA) regulation was proposed in 2022, then passed in 2023. This law creates clarity around crypto markets and stablecoins noting, among other things, that crypto oriented business transacted in Europe would need to be done with euro-backed stablecoins. It also has provisions for reserve requirements for stablecoins, creates AML/KYC provisions, and directly address ways to successfully operate in the markets. The point is, the EU is way ahead of the US here, as its provisions go into effect June 30. In doing the EU has taken one step closer to the thing everyone wants in this space… clarity.
While not regulation, the Ethereum ETF listing approval is the first step to such clarity in the US and, because of it, we can remove the specter of an over aggressive SEC consistently attacking crypto off the table, at least for now. But we need more than a lack of fear, we need proactive creation of frameworks that support this industry.
Fortunately, that is happing now as well.
The US wants to get FIT
Everyone wants to have a healthy body… and there’s an age-old secret (that’s not much of a secret actually) for doing so. How do you have a healthy body? It’s not rocket surgery. It’s a function of diet and exercise. It simply requires a little commitment. Likewise, how do you have healthy, regulated crypto markets? It’s not rocket surgery. Start passing regulation that provides clarity and facilitates industry growth (Instead of reigning down 100-year-old tests that don’t fit our sector). It simply requires a little commitment. Now, just like humans want to be fit, it seems that the US government is finally interested in this industry being FIT as well. (Thank you for humoring that elaborated and hopefully-not-too-painful analogy.)
But before we talk about the Financial Innovation and Technology for the 21st Century Act, (FIT21) let’s do a little review of some current events that are relevant. Both the house and the senate, in a bi-partisan move, sent a very progressive bill to the White House in May. This was known H.J.Res.109, and directly dealt with whether banks can custody crypto. More specifically, it addressed rules laid down by the SEC in their Staff Accounting Bulletin 121 (SAB121), which prevented banks from acting as custodians. Congress responded with Resolution 109 basically noting that the SEC needs to stay in its lane and keep lawmaking up to them. It was a little frustrating to see this vetoed by the White House (notably, it seems the statute of limitations had passed so a veto was inevitable), but what is important is that many democrats broke rank to make this resolution happen and, even with the veto, the White House noted it would be open to creating proper regulation for the industry.
This sets the stage for FIT21, which is designed to forward actual, proper, meaningful crypto regulation in the US. It does this by dividing up regulatory responsibility and classifying digital assets as either “Restricted Digital Assets” regulated by the Securities and Exchange Commission (“SEC”), or “Digital Commodities” regulated by the Commodity Futures Trading Commission (“CFTC”); thereby providing… clarity.
Importantly, it’s expected that most crypto assets would be considered commodities provided they adhere to the following criteria:
- Functional Blockchain: The related blockchain must be operational and in use. Investors must be able to trade the asset.
- Decentralization: The asset must not be under the unilateral control of a single person or entity for at least 12 months. Additionally, if an individual or entity owns 5% or more of the asset’s total supply, it could be classified as a security instead.
Now, innovators will have guidelines that are easy to follow, which leaves no question if a standard is met (or not). Imagine that. There are of course, more nuances to it but that’s the gist.
What is also critically important is that the White House has issued a statement that it will not veto FIT21 when it comes through. Another big win. Of course, given that this is an election year, I’m not quite sure this will make it through the Senate before November so it may be a function of a lame duck session, but what is important is that it’s a real step by our regulatory bodies to participate in the growth of this market and not act as an after-the-fact police officer.
And, speaking of election years…
Dems Do Crypto
For a long-time party lines have been pretty clear. While the industry has had both supporters and detractors on both sides of the aisle, generally, Republicans have been pro-crypto while Democrats, seemingly, have been anti-crypto. The truth is that there are actually quite a lot of democrats who have been pro crypto, but they have been overshadowed by the likes of Gary Gensler and Elizabeth Warren, both of whom seem to have made it their life’s mission to prevent the growth of this industry and, as a corollary, stunt innovation here in the US.
I guess the rest of the party figured this out. As a starting point, it’s rumored that the SEC’s about face regarding the Ethereum ETF approval was probably directed by the White House, who realized that they need to get behind this issue given that the roughly 50M crypto holders in the USA are a swing vote. Meanwhile Senate Majority Leader Chuck Schumer broke ranks with Warren in support of Res 109. In addition, some democrats are calling for the resignation of SEC chair Gary Gensler. And, in the case of case of FIT21, 71 democrats got behind the bill in the House.
This points to the fact that this is, appropriately, a bipartisan issue and the expectation is that both parties will support the industry going forward. This is very exciting indeed and is just pours more gas on the fire for this bull run.
In Closing
We are in an unbelievable time in history. Bitcoin ETFs are trading. Ethereum ETFs are on the way. The US is moving forward on meaningful regulation. The path has been set for innovation again in our country. All of this is coinciding with the Halving event that happened in April, a projected dovish stance by the fed with rate cuts and QT ending. And, all of this is before we have mass adoption.
So, imagine a road. A very wide, very long road. On this road, we have basically nothing but green lights yet, the road is being used by remarkably few cars. I argue that there has never been a time with this much risk off the table in this industry, and so much opportunity ahead. Yet so many are still very wary. So, if you are on the road, enjoy the green lights we are now experiencing. If you aren’t… it might be time to consider getting in the race.