New Spot Ethereum ETFs Approved

SEC missteps lead to happy surprise

Ric Edelman: It's Tuesday, May 28th. On today's show, the new spot Ethereum ETFs. We've come a long way since Laszlo Hanyecz paid 10,000 bitcoins for a couple of pizzas way back in 2010. Bitcoin's blockchain now processes three quarters of a million transactions every day, and its market cap is bigger than Facebook, Berkshire Hathaway, Eli Lilly, JP Morgan, Visa, Walmart, and Exxon Mobil. 

But for all of its attributes, bitcoin has significant limitations. For example, its price fluctuates a lot. Since 2017, Bitcoin's average daily price movement is 3%, or three times more than the S&P 500. So while bitcoin is an efficient store of value, it's not really usable as a currency. Bitcoin also takes a long time, seven seconds, to verify each transaction on the bitcoin blockchain. 

By comparison, in those same seven seconds, Visa processes 12,000 transactions. So scale is an issue for bitcoin. And the biggest problem for bitcoin is that its transactions are processed immediately. And you might not want that to happen. Think about it. When you give money to somebody, it's usually because they did something for you. You buy an ice cream cone, they hand you the cone, you hand them the money. Sometimes you have to pay in advance. That always makes you nervous. I mean, you can be confident when you buy a dishwasher from Sears that Sears will deliver it, but other settlements aren't so certain. Some contracts depend on unknown outcomes. 

The weather, for example, or who's going to win a sporting event, or will there be a price, or an interest rate movement. You name it. All these are called conditional transactions. They're the basis for pretty much every legal contract in the world. Bitcoin can't really help you with “if, then” transactions, because if you send me your bitcoin, I receive it almost instantly. If you want me to get your money only after you get what you were promised to get, then bitcoin is not really helpful.  

Enter Ethereum. Ethereum was invented in 2015. It's known as programmable money, or smart contracts. It lets you control the timing of your transmittals. This fundamental feature explains why Ethereum is now the second largest digital asset by market cap, almost $500 billion. Bitcoin's $1.3 trillion. Between bitcoin and Ethereum, they've got about 90% of the entire crypto market. In other words, Bitcoin and Ethereum are the Coke and Pepsi of crypto. So yeah, there is great enthusiasm for bitcoin as a store of value, and yeah, there is an equally great enthusiasm for Ethereum as a commercial application, because it's useful in virtually every industry in the world. 

Some of the biggest brands in the world are building projects on the Ethereum blockchain today. We're talking Nike, Starbucks, Louis Vuitton. It's also the primary platform for stable coins and DeFi. Those markets are each worth more than $150 billion. That's why there's so much excitement about the new spot Ethereum ETFs. 

Eight of them were approved by the SEC on Thursday, including Bitwise, Fidelity, Franklin Templeton, Invesco Galaxy, and BlackRock. The same ETF providers that created the bitcoin ETFs are now going to offer Ethereum ETFs. Standard Charter predicts that these new Ethereum ETFs are going to get inflows of up to $45 billion in just the first 12 months alone. 

That's on the same pace as the new bitcoin ETFs. But you can't buy these Ethereum ETFs yet. That's because the SEC has totally messed up this entire process. The dysfunction at the SEC and the White House has been astonishing. I'm going to give you a little bit of that backstory. 

So we now have Ethereum ETFs. The approval came just five months after the SEC approved spot bitcoin ETFs. The SEC only did that after a court ordered Gary Gensler to do so, but he's still been dragging his heels on approval for Ethereum ETFs. This has been very frustrating to the crypto community. And the bottom line has been that the SEC had a statutory deadline of May 23rd to say yes or no to the very first of these applications submitted by Van Ek. 

And there had been no movement by the SEC. Normally when there's an application to launch a new fund, there's a lot of dialogue, lots of meetings between the applicant, and the regulator, but it had been crickets. There hadn't been much movement at all, and everybody in the crypto community had concluded as a result of this, that since the SEC wasn't engaging on these Ethereum applications, the SEC was obviously going to reject them. 

And that was pretty much the consensus all the way through the past several months. All the way up to about 72 hours before May 23rd. Suddenly out of nowhere, the SEC started engaging with the ETF sponsors, lots of back and forth requests for amendments on the applications. And this was going on for quite some time. 

And suddenly everybody is scratching their heads saying, golly, geez, the sec about to approve these after all, what has been going on here? What has caused this change in sentiment? Well, the sentiment did change. The SEC did get the amendments that it wanted. And gave approval very late on Thursday, like around five or six o'clock in the evening. Thursday, by the way, right before the Memorial Day weekend began. 

Was this a part of the Gensler's game to make everybody think that they weren't going to move forward and then finally do so at the 11th hour, just as everybody's going on a four-day vacation so that nobody knows it's coming. Everybody's flat footed. There's no preparation. Nobody's engaging in marketing on this. 

Nobody's preparing financial advisors or the investment community that the ETFs are about to be approved. In fact, this was so late in the game that the SEC wasn't even able to complete all of its work. I mean, yeah, the 19-B filings were completed, but not the S-1s. And without the S-1s, the ETFs don't have the permission to actually trade on the exchanges. 

Which means as of right now, you still can't trade these ETFs yet. This is no way to run a country. This is ridiculous. Can you imagine anybody anywhere coming up with something and nobody knowing about it and nobody having any anticipation that it's going to be allowed until, until suddenly, miraculously and unpredictably, it is suddenly available. 

This is really rather crazy. Why did it happen in this way? Well, there's been a lot of scuttlebutt about this. And the word out on the street is that the Democrats were getting a lot of political pressure to get Gensler to approve these ETFs. See, it's obvious that Gary Gensler has not been a fan of crypto. 

He has been obstinate ever since he's been the chair for three years. He's been hauled into Congress innumerable times to explain himself. Virtually every former SEC commissioner has lambasted Gensler on his handling of crypto over the years. The financial services industry is unhappy about it. The crypto community is unhappy about it. 

The investment community is unhappy about it. Congress is unhappy about it. But Gensler has been steadfast in his opposition. If a court hadn't ordered him to approve the bitcoin ETFs last summer, we wouldn't have the bitcoin ETFs either. So what changed? Well, here's the scuttlebutt. Over the last several months, the crypto community has realized they're not getting anywhere with the regulators. 

They're not making the case effective on Capitol Hill. So they got together and have raised about $50 million that they use to form a variety of political action committees, PACs, and they have been targeting members of Congress who have been opposed to crypto. They succeeded in having one Democrat candidate lose their primary. 

She actually cited the crypto community as the reason she lost her campaign. This has been getting the attention of the Democrats. You fast forward to more recently, Chuck Schumer, a leading Democrat in the Senate, who, by the way, is from New York, the home of Wall Street, and the message has been clear. If the Democrats continue to oppose crypto, then they run the risk of losing their elections and possibly control of the US Senate, while preserving control in the House by Republicans. Meanwhile, the banking community has been paying attention to the fact that there's $20 billion in bitcoin ETFs, all being custodied by a variety of companies, and none of them banks. Because under current rules, banks are not allowed to custody crypto. 

The banks are viewing this as a big, missed opportunity for their businesses. The banking community, the Wall Street community, the banking community, supported by the crypto community have been upping their lobbying efforts, throwing a lot of money at crypto candidates who are supportive of this industry and opposing the members of Congress and the candidates for Congress who oppose crypto. 

This has finally gotten the attention of the white House. They finally gave pressure to Gensler and at the last minute, with not a moment to spare, the SEC said yes to the Ethereum ETFs. This is why we believe there has been late day movement where a month ago, two weeks ago, everybody was sure the ETF applications would be rejected. Suddenly, surprisingly, they were approved. This is no way to run a country. But it's not a surprise that in politics, money talks. And now that Wall Street and the banking industry are realizing there's a lot of money to be made in managing crypto assets, they want in on the party. 

And they are tired of the obstinance from the White House and the SEC on this issue. So suddenly a whole lot of Democrats who had been opposed to crypto, are changing their tune. What's really interesting is an underlying issue here... is crypto a security? Is bitcoin a security? Is Ethereum a security? What about Solana and PolyGran and Algorand and Litecoin and Filecoin? Are these securities? Because if you're issuing something that is a security, you have to follow all the securities laws. Gold's not a security. Comic books are not a security. The Mona Lisa is not a security. Exotic Ferraris are not securities. Makes a big deal whether you are a security or not. Gary Gensler at the SEC has had the attitude that pretty much every digital asset is a security. He said bitcoin's not, and Ethereum might not be. He's not been definitive on anything else.  

Meanwhile, the Commodity Futures Trading Commission, the CFTC, they regulate commodities. The SEC regulates securities, and the CFTC says Ethereum is not a security, but it is a commodity and it has allowed Ethereum futures to trade for years on commodities exchanges. Well, not only has the SEC now said yes for political reasons to Ethereum ETFs, Congress is getting in on this too. On Friday, Congress passed FIT21, the Financial Innovation and Technology for the 21st Century Act, with strong Democratic support for the very first time. 

President Biden says he doesn't really like the bill, but he hasn't said he'll veto it. We're waiting to see what the Senate does, where the Democrats control. Bottom line, this bill gives crypto jurisdiction to the CFTC, takes it away from the SEC. That shows you just how angry Congress is over Gary Gensler's handling of crypto for the past three years. 

71 Democrats in the House voted for this bill. As you can imagine, Gary Gensler strongly opposed the bill because the bill makes him powerless over crypto, but everybody else, it seems loves it. The bill sets the rules for regulating the US crypto markets, establishes consumer protections, more clearly defines whether a digital asset is a security or a commodity. 

We've all been asking for this rulemaking for years, but Gary Gensler has refused to write the rules for any of it. Congress finally got so fed up, they did it themselves. Now it's up to the Senate and we're going to see if those crypto PACs have enough money and influence to get the Senate to pass the bill. 

The bottom line is the SEC's approval of the new Ethereum ETFs and the passage of FIT21 are clearly showing that the Democrats and the White House finally realized that their anti-crypto stance is not resonating with the American public. More people now own bitcoin than dogs. And it's becoming a campaign issue. 

And the contrast couldn't be more stark. Donald Trump has pledged to support the crypto industry. He now even accepts campaign contributions in bitcoin, Ethereum, and Solana. I'm not convinced that Trump really does love crypto. I think he's just being politically expedient, but he does have the ear of Vivek Ramaswamy, and Vivek is a big crypto proponent. 

Which is going to gain commercial and investor interest more, bitcoin or Ethereum? Which coin's price is going to rise faster? Well, instead of trying to choose between bitcoin and Ethereum, most financial advisors are probably going to choose to invest in both. Diversify. Some will allocate 50-50, others will overweight one, for example, preferring bitcoin as a store of value over Ethereum with its commercial use application. Others will go the other direction. They'll prefer Ethereum over bitcoin. As with all investment decisions, the choice is going to be yours. The only way you're going to be able to figure this out is for you to get well versed in all of this. 

You need to know what bitcoin is, what Ethereum is, how the two of them are different. Ethereum, for example, operates on a proof of stake protocol. Bitcoin uses proof of work. This is hugely and fundamentally different. It means you can earn income from Ethereum. You don't do that with bitcoin. You need to how all this stuff works, and the risks associated with investing in it. And that's why the timing couldn't be better. Now that the Ethereum ETFs are going to be coming to the market in the next several weeks, now is the perfect timing for you to attend VISION. 

This is my biggest crypto conference of the year. It is exclusively for financial professionals and accredited investors. It's June 2-4 in Austin, two and a half days of a deep dive into the latest going on in the subject of crypto. In fact, if you're new to this topic, we have a four-hour Pre-Con Workshop on Sunday where I'll be teaching you all the basics. What is blockchain? What is bitcoin? What is Ethereum? How do they differ? Understanding tokenization, DeFi and the metaverse. This conference is the leading, the oldest, the biggest event for the financial community and investment community to understand the latest and greatest of crypto. 

We've got Michael Saylor, who's company MicroStrategy is the world's biggest corporate owner of bitcoin. They own about 1% of all the bitcoin in the world. Michael Saylor will be doing a keynote. Chris Giancarlo, the former CFTC Chair who is known as Crypto Dad, he'll be there. 

We've got Katherine Molnar who runs a pension fund for police and firefighters that invests in Bitcoin. We've got the Association of Women in Cryptocurrency going to be there. It's a fabulous program. I really encourage you to come. All the details on the conference, the speakers, the agenda, how you can register it's at DACFP.com. The link is in your show notes. And this conference is not just for advisors. It's for the investment management teams, the compliance teams, and the risk officers as well. Because if you don't understand how this works, you can't let your firm engage in it. So I encourage you to join me in Austin, June 2-4. 

On tomorrow’s show, why the stock market is disappearing and what that means for your investment strategy. 

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