The Impact of Ethereum ETF Approvals on US Crypto Policy

When the U.S. Securities and Exchange Commission (SEC) signaled a willingness to approve spot Ethereum ETFs, it marked a surprising shift in the regulatory landscape for cryptocurrencies. This sudden change caught the attention of crypto lobbyists and market participants alike, suggesting a possible pivot in the U.S. government's approach to crypto regulation. This article explores the implications of this move, its potential influence on future crypto policies, and the broader political dynamics at play.

A Significant Shift

The SEC's unexpected openness to spot Ethereum ETFs represents a notable departure from its previous stance. For months, the regulatory body had been resistant to such approvals, maintaining a cautious approach towards cryptocurrencies. The abrupt change was described by Kristin Smith, CEO of the Blockchain Association, as a "remarkable pivot" and an unforeseen development. This shift raises questions about the factors influencing the SEC and whether this could indicate a broader change in the government's crypto policy.

Political Winds of Change

The sudden change in the SEC's stance appears to be influenced by recent political developments in Washington. A series of events, including President Joe Biden's veto threat against a pro-crypto bill and subsequent bipartisan support for the bill in the Senate, have reshaped the political landscape. The bill aimed to repeal an SEC rule, SAB 121, which discourages American banks from holding crypto assets. The surprising level of support from Biden's own party sent a clear message to the White House about the political importance of crypto.

Twelve Democrats, including Senate Majority Leader Chuck Schumer, supported the bill. This level of Democratic backing was unforeseen on Capitol Hill and undoubtedly sent a message to the White House, according to Kristin Smith of the Blockchain Association.

"To have that many Democrats break away from the Biden Administration after it already put out a veto threat on it," she said, "that is significant."

Compounding the situation is the recent shift among Republicans, including former President Donald Trump, who have begun explicitly supporting crypto. This has led to a perception among crypto industry leaders that only one political party is on their side.

Cody Carbone, Chief Policy Officer at the Chamber of Digital Commerce, suggested that the growing bipartisan support for crypto, coupled with explicit endorsements from prominent Republicans, pressured the Biden Administration to reconsider its stance. In a tight election climate, this issue became too significant to ignore, prompting a strategic retreat from the Administration.

“The Administration is seeing, in a very tight election that can be swung by a few million votes, that this is not the hill to die on,” Carbone said.

The SEC's Tactical Response

That evolution in Biden’s thinking was evident on Wednesday when the president issued a statement regarding another crypto-related bill, FIT21, which seeks to create a federal framework for regulating crypto. While Biden objected to the bill’s passage, he did not threaten to veto it, unlike his stance on the repeal of SAB 121 last week.

On Wednesday afternoon, FIT21 easily passed in the House, 279-136, with support from 71 Democrats, including former Speaker of the House Nancy Pelosi.

Ji Kim, chief legal and policy officer at the lobbying group Crypto Council for Innovation, sees the events of the last week as proof that crypto has now, albeit suddenly, graduated into a topic of consensus within U.S. politics. "What this all means is that crypto is absolutely a bipartisan issue," he said, "and that members of Congress are further realizing crypto is absolutely here to stay."

For the same reasons the White House is now shifting its stance on crypto to save face, the SEC is too, according to crypto lobbyists, especially since the unexpectedly popular, bipartisan repeal of SAB 121 singled out the policies of SEC Chair Gary Gensler.

Rubber-stamping spot Ethereum ETFs—which would allow Wall Street firms to buy and store ETH on behalf of their clients—might be the most visible way for Gensler to ease the pressure, estimates Kristin Smith of the Blockchain Association. "I think this is his sort of peace offering, to show that he is open to this space, and he realizes now that the political winds are against him," she said.

Broader Implications for Crypto Policy

However, crypto lobbyists disagree on what this move would mean for the SEC’s long-term crypto policy. Smith is optimistic that this change of heart would mark a significant shift in how Gensler and the SEC might regulate crypto moving forward. "I think he's going to have no choice but to back down," she said of the SEC Chair. "That doesn't mean he goes back and undoes all the actions that he's initiated—but he's going to have to think twice before doing something aggressive against the crypto industry."

Cody Carbone of the Chamber of Digital Commerce, however, has a less optimistic view. He believes that the approval of spot Ethereum ETFs would be nothing more than a calculated political maneuver on Gensler’s part, rather than a meaningful change in the SEC’s outlook on crypto. "I don't think you're going to see him dropping any of these cases or stop fighting," Carbone said of Gensler. "I just don't think you'll see any more headlines. Most of his decisions are driven by PR."

A Bipartisan Issue

The events of the past week have underscored the bipartisan nature of the crypto debate in the U.S. Congress. The passage of FIT21, a bill aimed at creating a federal framework for regulating crypto, with significant support from both parties, highlights the evolving consensus on the need for clear and consistent crypto regulations. Ji Kim, chief legal and policy officer at the Crypto Council for Innovation, noted that these developments indicate that crypto is now a topic of consensus within U.S. politics, with members of Congress acknowledging its permanence.

Future Regulatory Landscape

Looking ahead, the potential approval of spot Ethereum ETFs could catalyze further regulatory clarity and innovation in the crypto space. While the immediate impact might be limited to specific financial products, the long-term implications could be profound. A more accommodating regulatory environment could encourage innovation, attract investment, and solidify the U.S. as a global leader in the crypto industry.

However, the path forward remains uncertain. The SEC's future actions and the broader regulatory approach will be influenced by ongoing political dynamics, market developments, and the evolving public perception of cryptocurrencies. Stakeholders in the crypto industry will need to remain vigilant and engaged, advocating for balanced regulations that promote growth while protecting consumers.

Bottom Line

The SEC's potential approval of spot Ethereum ETFs marks a pivotal moment in U.S. crypto policy. This development, driven by shifting political winds and growing bipartisan support, suggests a possible recalibration of the government's approach to crypto regulation. While the long-term implications are still unfolding, this move could signal the beginning of a more constructive and integrated regulatory framework for the burgeoning crypto industry.