Ethereum

Had some talks with crypto & securities lawyers re $ETH ETF approval.

Will try to put what I heard in a 🧵 here, just listing things.

To be clear: not legal advice, not financial advice. Opinions of people and conclusions of a frog with a hockey stick only. DYOR. I know nothing

Entrepreneur, Investor & Hockey Player. #bitcoin & #crypto since '13. Opinions, never investment advice. Beat Wizardry 7 before you were born. 🏳️‍🌈

1/ What can SEC do?

Come May 23rd, SEC can deny, approve or ask issuers to pull applications.

In case of denial or pulling, issuers can re-apply immediately, starting a new max 240 day clock

ARK is first on block and may just agree to pull. In June, Grayscale is the big one.

2/ What happens in a court battle between issuers and the SEC?

The key will be the reason the SEC uses to deny. It looks like these could be:

- correlation between futures and spot
- alleging $ETH is a security
- a technicality

None of these look strong.

If the SEC denies on the basis of correlation, then you’ll have several experts showing slightly different numbers for slightly different time scales, but it is a matter of time before the all converge and it is a weak case to argue as public documents already show.

If the SEC denies on the basis of $ETH being a security, they are picking a fight with the CFTC. They would basically say that $ETH futures and their ETFs are all security products. Which goes against years of practice now & implicit approval so far.

Even if the SEC were to claim that the merge changed everything that is also now 18 months ago and it seems likely even a judge would ask the simple question “why did you not intervene before?”, let alone opposing counsel.

So far, SEC has separated staking in suits so an approval of the ETF ≠ approval of staking

So that leaves a technicality. The general feeling is that, if there is one, it is one that Gary still has to come up with. Ie the filers are very experienced, all topics have been dealt with in regards to $BTC approvals, so it will be tough to pull this off. May be poor case too

Everyone I talked to seems to feel that, despite the SEC knowing ahead of time which arguments they have to beat (given Btc decision), Grayscale would be very likely to win a court battle on any of these issues.

I also asked if it is likely the Democratic CFTC colludes with the SEC here, but the people I talked to were of the opinion this would not happen and that the two were not talking on this. Opinion only obviously.

So if the SEC denies the $ETH ETF right now AND Grayscale sues, they’d likely be facing a public court battle right around election time and be at odds with their sister agency, which is not a great look either, but has happened before.

At the same time, nobody is denying  Gary’s universal hatred for crypto. But there is a sense that he may have put himself in an impossible position. Next to the drama with CFTC and a court battle, if the SEC alleges $ETH to be a security in a denial they’d have to give reasons.

They can’t just say “Howey”. That may give them a short term victory, but in the medium term could be seen as even worse by Gary. Because it would establish a framework the industry would then use to become compliant and then strives, which is the last thing he wants.

As an example, if the SEC says “Ether is a security after the merge because validators are too centralized” then users will arrange for this criterion to be met in the future and the SEC takes away their handy tool of just shouting “But Howey”. They’d open the floodgates.

3/ So what will the SEC do?

Of course, there is no final answer for this. The people I spoke to all thought that denial was around 60/40 more likely than approval. Also all of them thought it should be approved though on the merits.

They do not think btw that this ETF is important to any of the candidates in the presidential election. Ie they think Gary is universally anti-crypto and won’t act differently in an election year than otherwise. They do think there may be infighting right now at the SEC on it.

I personally think a lot depends on whether the SEC thinks any issuer is likely to sue. If they will all play ball to kick the can down the road, then it’s an easy pull and refile ask by SEC. That’s why I think Grayscale is key. They are the only ones who are likely to sue IMO.

Price wise, my view has changed a bit. I used to think that an ETF denial kills altseason and certainly $ETH as an asset. It’s already unusable as a chain due to fees after all. But now I am not so sure.

That’s because I think the largest “trading” holders (those who would sell on this kind of news, ie hedge funds) already spoke to legal experts and probably got the same conclusions. Plus, as someone pointed out, even Polymarket is showing low approval odds.

So it’s unlikely the current market is built on the ETF as a given. That means less downside in case of denial and much more upside in case of approval. Denial and a Grayscale suit may actually have the same effect as with BTC where any postponement was essentially Bullish.

So I (personal opinion) expect a muted reaction to pull&refile scenario, a V-shaped dump with quick recovery in case of denial and suit, and an explosive move up in case of approval. This news is not “sell the news” right now. Denial without a suit may be tougher.

In terms of signals, my discussions lead me to think that if the SEC has no reported interactions with issuers by April 10ish, approval is almost impossible.

Hope this was helpful. None of it is advice. I know nothing. Do not buy or sell anything based on this.

They might like their chances in court and ask the SEC to come out with a formal answer.

If the SEC denies and Grayscale sues, it could take about a year to resolve, which is longer than 240 days and a potentially new head of the SEC given election in between…