Top 5 Reasons Why SEC Nods to Spot Ethereum ETF

The iconic approval of eight Spot Ethereum ETFs by the U.S. Securities and Exchange Commission (SEC) marks a massive milestone in the evolution of crypto investment products. The decision, driven by various factors, reflects a nuanced approach to regulation and market dynamics. Here are the top five reasons behind the SEC’s nod to the Spot Ethereum ETF.

1. Correlation Between Ethereum Spot And Futures Market

A key factor in the SEC’s decision is the high correlation between the Ethereum spot market and CME Ethereum futures. Data from the SEC’s analysis confirms that the CME ether futures market has consistently shown high correlation with certain spot Ethereum trading platforms over the past 2.5 years.

The correlation values are impressive: 96.2% on an hourly interval, 85.7% on a five-minute interval, and 67.1% on a one-minute interval. Rolling three-month correlations further validate these findings. It ranges from 86.4% to 98.4% on an hourly interval, 75.8% to 90.2% on a five-minute interval, and 58.6% to 75.9% on a one-minute interval.

Such robust correlations provide the SEC with confidence that the CME ether futures market and spot markets are closely aligned. This reduces the risk of fraud and manipulation through comprehensive monitoring and sharing agreements.

2. Political Pressure Due to Upcoming U.S. Presidential Elections

The upcoming 2024 U.S. presidential elections have introduced a political dimension to the SEC’s decision-making process. Pro-crypto candidates like Robert F. Kennedy Jr. and Donald Trump have increased the political stakes surrounding cryptocurrency regulation. Moreover, this political landscape has influenced the Biden administration to adjust its stance on cryptocurrency.

Historically, the Biden administration has been tough on the crypto market. However, with younger voters being crucial for the Democrats, showing support for innovation and crypto could be strategically beneficial. This shift is seen as a move to appeal to a broader voter base by presenting a progressive stance on emerging technologies.

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3. Pressure From US Lawmakers

Bipartisan pressure from U.S. lawmakers has significantly influenced the SEC’s decision. On May 23, a group of House lawmakers, including Majority Whip Tom Emmer and Democrat Josh Gottheimer, sent a letter to SEC Chairman Gary Gensler. They urged the SEC to approve spot Ether ETFs and other digital asset products.

Moreover, they emphasized the need for regulated, transparent, and secure investment avenues for cryptocurrencies. The lawmakers highlighted that approval of such ETFs would offer investors regulated options while maintaining rigorous market surveillance and enforcement of securities laws.

4. Removal Of Staking Clause From Spot Ethereum ETF Applications

The removal of the staking clause from Spot Ethereum ETF applications was a crucial regulatory adjustment. On May 21, Fidelity updated its S-1 application to the SEC, clarifying that the underlying Ether (ETH) tokens would not be staked. This addressed concerns about the security and regulatory implications of staking activities.

Moreover, following Fidelity’s lead, other major players like Grayscale and BlackRock also removed staking clauses from their applications. Earlier, Ark 21Shares also initiated a similar move. Hence, the SEC might have weaponized the dynamics of ETH and staked ETH to grant approval.

5. Passing Of The FIT21 Bill

On May 22, House of Representatives passed the The Financial Innovation and Technology for the 21st Century Act (FIT21). The bill, which passed with a vote of 279 to 136, includes critical updates favorable to the crypto industry:

• CFTC as leading regulator: The Commodity Futures Trading Commission (CFTC) is designated as the primary regulator for digital assets. This assigns clear roles to the CFTC and the SEC.
• Clear regulatory distinctions: The bill clarifies that the CFTC will regulate functional and decentralized crypto assets, while the SEC will oversee those classified as securities but not decentralized.
• Consumer protection: The bill establishes consumer protection measures, limiting the SEC’s authority over crypto exchanges and reducing regulatory uncertainty.

The FIT21 bill’s passage signals a more structured and balanced regulatory approach. Moreover, this development could have positively impacted the SEC’s decision on the Spot Ethereum ETF.

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