United States: The political backstage of a historic U-turn

A real thunderclap. While the horizon has been steadily darkening for the US crypto ecosystem for several months, the Securities and Exchange Commission (SEC) is finally set to approve, against all odds, the first Ethereum Spot ETFs.

Before long, it will be possible for all US investors to invest in ether (ETH) via their securities account with their usual broker without having to worry about the creditworthiness of the platform on which they buy the cryptos or how secure they are.

For ether, this is a huge boost to its institutionalisation, four months after the first Bitcoin ETFs arrived in the US.

"Before Monday evening, the SEC had shown no signs of progress or cooperation on Ethereum ETF filings. The speed of the process caught everyone by surprise," marvels Townsend Lansing, a highly-respected voice in the ETF industry and Head of Product at CoinShares, a European asset manager that has a Bitcoin ETF on Wall Street.

In fact, the prognosis had been very unfavourable in recent weeks and almost the entire industry was expecting the SEC to reject the VanEck application, which had a review deadline of 23 May.

So how do you explain such a turnaround?

The SEC was not necessarily obliged to accept

"A refusal by the SEC in the VanEck case would have forced the regulator to justify its decision and it could have found itself facing a proliferation of lawsuits with a more than uncertain outcome," a US lawyer who has worked for the SEC tells The Big Whale.

What we need to understand is that the SEC probably took the lead but was not legally obliged to do so this week.

"Theoretically, it still had the option of waiting since there had been no court ruling forcing its hand as happened with Bitcoin in the pitting it against Grayscale", Townsend Lansing points out.

In August 2023, the US courts ruled in favour of asset manager Grayscale against the regulator, which refused to authorise its Bitcoin ETF on the basis of arguments deemed inadmissible.

However, the reason why Ethereum ETFs have finally been accepted seems to be more political.

More than 20% of pro-crypto voters in "swing states"

According to several US sources interviewed by The Big Whale, the two major US parties have identified crypto users as potential voters ahead of November's presidential election.

It has to be said that they carry increasing weight: according to a survey commissioned by Coinbase and published in February 2023, nearly 20% of Americans have invested in cryptos.

In addition, a study published on 7 May (commissioned by Digital Currency Group) even suggests that more than 20% of voters living in certain "swing states" (politically undecided states that tip the balance at the polls) would see crypto as an important issue. Also, 55% would worry that policymakers would stifle innovation through over-regulation.

"The only reasonable explanation for the SEC's reversal is that opinion research is so unfavourable to Democrats that they realise that squeezing the sector could lead to losses at the ballot box in November," says lawyer Preston Byrne, Managing Partner at Byrne & Storm. "I think the parties have identified the issue internally," insists this historic industry expert.

As a reminder, SEC chairman Gary Gensler is reputed to be close to the Democratic Party. And with six months to go before the election, a poll published on 13 May in the New York Times indicates that Joe Biden (Democrat) is significantly behind Donald Trump (Republican) in five of the six "swing states".

"By reaching out to this politically undecided electorate, Joe Biden hopes to claw back votes from his rival, who has been making an increasing number of pro-crypto statements of late", blows another specialist American lawyer.

It has to be said that Donald Trump no longer hides from "hitting on" this community. On 8 May, he told a gala organised for the holders of his NFT collection that he regretted that the sector was "leaving the United States because of hostility towards it" and promised to "stop it". On Tuesday, he took the opportunity to announce that he was accepting donations in cryptos to fund his campaign.

Will the SEC soon be incompetent to oversee decentralised projects?

This political pressure to loosen the regulator's grip was also illustrated on 16 May when a bipartisan deal was pulled off by surprise in the Senate. This made it possible to cancel by a large majority a "Staff Accounting Bulletin" (SAB 121), despite being supported by the SEC, which planned to add a huge amount of red tape to professional crypto custodians.

This vote brought traditional banking players together because "they increasingly see cryptos as part of the future and therefore a very lucrative business", comments a former SEC lawyer on condition of anonymity.

Proof that the subject is bubbling over in the United States, a bill on "financial innovation and technology for the 21st century", known as FIT21, was passed yesterday by the House of Representatives. In particular, it provides that the SEC will no longer be responsible for supervising crypto projects when they are sufficiently decentralised (primarily Bitcoin and possibly Ethereum), in favour of the Commodity Futures Trading Commission (CFTC), which deals with commodities.

If the bill goes through, it would end the turf war between the two agencies and give the court system a specific framework to adjudicate regulatory disputes in crypto for the first time.

And above all: it could mean the beginning of the end of an anti-crypto cabal that has been particularly intense since the fall of FTX in November 2022 initiated by the SEC and its chairman Gary Gensler. "All indications are that the anti-crypto crowd is really starting to lose ground politically," concludes the former SEC lawyer.