This week, the United States passed the cryptocurrency regulatory reform bill, showing a policy shift. China has expanded the pilot scope of the digital yuan, while the United States opposes CBDC. The token allocation of Swell and Bedrock is the highest on the deposit and repledge platform. MetaMask plans to add Bitcoin support, and Phantom wallet beats PayPal. The Trump campaign team accepts cryptocurrency donations, and Hong Kong may allow Ethereum spot ETF pledging. ZkSync plans to generate tokens this week and conduct airdrops. Uniswap Labs responds to the SEC’s lawsuit, calling it “weak and incorrect.” Yuga Labs abandons CryptoPunks due to opposition. The London Stock Exchange will list its first cryptocurrency ETP.
Title: Weekly Stories – 5/24
Authors: Charles Yu, Alex Thorn, Christine Kim
Source: galaxy
Translation: Lynn, Mars Finance
In this week’s newsletter, we wrote articles about the approval of Ethereum spot ETP, the passage of the FIT21 bill by the US House of Representatives, and the CBDC pilot in Hong Kong, China.
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One Step Closer to Ethereum ETP
The SEC has approved key regulatory filings for the trading of spot Ethereum ETP in the United States. On Thursday, the SEC “accelerated” the approval of the 19b-4 proposals filed by three exchanges, namely the Chicago Board Options Exchange, NYSE Arca, and Nasdaq, which sought to list spot Ethereum ETP, clearing a major hurdle for these products to begin trading. According to the notice posted on the SEC’s website, “after careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder applicable to national securities exchanges.”
This approval comes after a sudden turn in the Ethereum ETP approval process on Monday when the regulatory agency responded to exchanges and potential ETH ETP issuers with comments aimed at expediting the approval process. Prior to this week, the SEC had limited contact with potential issuers, leading many to believe that the SEC was not yet ready to approve an ETP. Bloomberg Intelligence ETF analysts Eric Balchunas and James Seyffart predicted a 25% chance of approval this week, but the odds increased to 75% after positive developments on Monday.
Before spot Ethereum ETFs can begin trading, the SEC still needs to approve the issuer’s S-1 filing, and there is currently no clear timeline for that. Seyffart believes that S-1 approval and ETF launch will take “several days (at least), possibly at least several weeks, or even several months,” while his colleague Eric Balchunas stated on Galaxy Brains that the process could be completed as early as the next two weeks.
Due to the improved prospects of ETP approval on Monday, the price of Ether jumped from below $3,100 to over $3,700 and reached a high of around $3,940 after the SEC’s approval was confirmed on Thursday.
Our Take:
The approval of the 19b-4 filings by the SEC marks an important milestone for the industry and a significant policy shift for the securities regulatory agency. Many speculate that this sudden shift is a result of pressure from the Biden administration, as the past few weeks have seen major Democratic party votes in support of cryptocurrency legislation.
This development is also positive for several reasons: (i) it indicates that the SEC does not view Ethereum as a security, which Chairman Gary Gensler has previously declined to state in interviews; (ii) the correlation analysis between spot and futures prices of Ether submitted in the 19b-4s has met the SEC’s requirements; (iii) it builds on the growing political support we have seen in Congress recently, such as the overturning of SAB 121 and the passage of the FIT21 bill last week.
However, it remains uncertain whether the issuers’ submitted S-1 forms will ultimately be approved and the specific timeline is unknown. Key questions for the future include: how long will the S-1 issues take to resolve? Most issuers have removed the option for pledging from their applications. How will the demand for Ethereum ETFs compare to Bitcoin ETFs? Will potential investors be deterred from purchasing the ETFs due to productivity loss (i.e., inability to pay gas fees to access DeFi and other applications) or giving up staking rewards?
From a regulatory perspective, what will be the status of staked ETH (the SEC has claimed in lawsuits against Coinbase, ConsenSys, and other companies that staked ETH products are securities)? Will these ETF issuers eventually be approved to offer staking of ETH?
Will regulatory agencies soon approve ETPs for other cryptocurrencies?
In any case, the approval of the spot Ethereum ETP on Thursday is a significant breakthrough and has positive implications for the entire industry. As we have seen so far with Bitcoin ETPs, last week’s 13F filings were very favorable for future Bitcoin demand—both inflows and institutional holder lists were better than most anticipated. Notable RIAs, hedge funds, and even pension funds have bought ETPs, while banks and brokerage platforms have yet to open access to ETPs, which could be a major unlock for future institutional adoption of cryptocurrencies. – Charles Yu
House Passes Comprehensive Cryptocurrency Market Structure Bill
The “FIT21 bill” was passed with the support of up to 71 Democrats and House Republicans. On Wednesday, the US House of Representatives passed the “21st Century Financial Innovation and Technology Act” (“FIT21”), a comprehensive regulatory reform that specifies when and under what conditions digital asset tokens or exchanges/brokers will be regulated by the US Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). The bill clarifies the boundaries between the SEC and CFTC, giving the CFTC more power and is a rebuke to the SEC’s current stance that almost all digital assets are “digital asset securities.”
The vote took place around 6 pm Eastern Time on Wednesday and passed with a vote of 279 in favor and 136 against, with 71 Democrats, representing one-third of the caucus, voting in favor.
The bill also requires token creators to provide “accurate, material disclosures, including information relating to the operation, ownership, and structure of the digital asset project” and provides a legitimate way for token issuers to raise funds. On the business side, the bill requires companies providing crypto services (i.e., exchanges, brokers, etc.) to separate customer funds from their own funds, provide disclosures, and undergo regulatory scrutiny.
The bill received the broadest bipartisan support in the history of crypto legislation, thanks in part to the high-profile support of Democratic leaders like Representative Nancy Pelosi (D-CA) and the ever-changing political climate where crypto has become a major political issue.
Our Take:
This vote has important implications both in terms of policy and politics. In terms of policy, the bill is broad in scope and scale and is the most significant crypto legislation passed by Congress. The bill is complex, and many parts may have a negative impact on the industry, including creating a peculiar bifurcated market that may harm liquidity or the overall market. However, overall, FIT21 sets the direction needed for the US to protect consumers, support innovation, maintain and enhance US competitiveness, and regulate the crypto market.
However, political factors may be an even bigger issue. The Democratic support for FIT21 is more than three times the support for SAB 121 by House Democrats two weeks ago. Despite explicit threats of a veto from the White House, the overturning of SAB 121 passed in both the House and Senate, and the Trump campaign team has now explicitly formed a “crypto army,” elevating crypto policy issues to the national stage, and the Democrats no longer seem willing to hand over this issue to the Republicans. The White House’s veto threat regarding SAB 121 two weeks ago included hyperbolic language suggesting that overturning the rule would cause “financial instability,” but the government policy statement about FIT21 two weeks later is conciliatory in language, notably without a veto threat. These two government policy statements are only two weeks apart, but there is a difference, which clearly indicates a shift in the White House’s political strategy on this issue.
Senate Majority Leader Chuck Schumer (D-NY) voted to overturn SAB 121. Former House Speaker Nancy Pelosi (D-CA) voted in favor of FIT21. Representative Maxine Waters (D-CA), a senior member of the House Financial Services Committee, and Representative David Scott (D-GA), a senior member of the House Agriculture Committee, both opposed FIT21 but explicitly stated that they would not vote against it. However, in just the past two weeks, Democratic Representative ElizabethThe small rift between the Warren faction and the White House, Senate leadership, and one-third of the Democratic caucus in the House has grown into a bigger wedge. This is a significant political shift. Whether it will lead to a real policy shift for the current Democratic administration or any future single-party government remains to be seen. – Alex Sohn
China Extends Digital RMB Payment System to Hong Kong
On Friday, May 17, the Hong Kong Monetary Authority (HKMA) and the People’s Bank of China (PBoC) announced that they will expand the pilot scope of the digital RMB to Hong Kong and facilitate Hong Kong residents in setting up and using digital RMB wallets. The digital RMB, also known as the digital yuan, is a central bank digital currency (CBDC) issued by the Chinese government and has been piloted in mainland China as early as 2019. It is the largest and most advanced CBDC pilot in the world. According to an article by the Atlantic Council in 2023, there are 1.361 billion RMB in circulation on the digital RMB network, with 260 million wallets.
This is the first time the digital RMB is being piloted outside of mainland China. Eddie Yue, the Chief Executive of the HKMA, said, “We are delighted that Hong Kong, as the first place to conduct cross-boundary digital RMB pilot, has also become the first place outside mainland China to allow residents to set up digital RMB wallets locally. By expanding the pilot of digital RMB in Hong Kong, leveraging the advantages of ‘Transfer Faster’ 24×7 service and real-time transfer, users can top up their digital RMB wallets anytime and anywhere without the need to open a bank account in mainland China, facilitating Hong Kong residents in making payments to mainland merchants. We will continue to work closely with the People’s Bank of China to gradually expand the application of digital RMB, enrich the functions of digital RMB wallets available to Hong Kong residents, and step up efforts to encourage more retail merchants in both places to accept digital RMB.”
Earlier this year, the HKMA announced that they are advancing their own CBDC, the digital Hong Kong dollar, in testing. Notably, unlike other CBDCs being experimented by governments around the world, the digital RMB does not use blockchain or distributed ledger technology. However, while the Chinese government is advancing the digital RMB, they are also committed to the Blockchain Service Network (BSN). The BSN is a universal blockchain similar to Ethereum where companies and software developers can build blockchain-based applications. In December 2023, the Chinese Ministry of Public Security announced that they will launch a decentralized identity service called RealDID on the BSN.
On Thursday, May 23, the U.S. House of Representatives passed a Republican-led bill to prevent the Federal Reserve from issuing CBDCs to individuals. The bill, introduced by Republican Representative Tom Emmer of Minnesota in September 2023, stated, “Unless designed to be open, permissionless, and private – like cash – a government-issued CBDC is nothing more than a Chinese-style surveillance tool that will be used to undermine the American way of life.”
Our perspective:
The U.S. and China continue to take starkly different approaches to digitizing their respective currencies. China recognizes the clear advantages of the digital RMB (simplified cross-border payments, expanded public use of RMB, 24/7 operation, and real-time transfer advantages) and is doubling down on advancing the digital RMB system, extending it to the first location outside mainland China. As an international gateway to mainland China, Hong Kong is an important global financial center, and the digital RMB system will be introduced here for the first time to a global audience.
Meanwhile, the Federal Reserve’s stance on CBDCs seems to have not significantly changed since their research on CBDCs in 2022, which you can read more about in a previous Galaxy Research newsletter. At the same time, U.S. lawmakers, primarily Republicans, are doubling down on their opposition to CBDCs and recently passed legislation called the CBDC Anti-Surveillance Act, limiting the Federal Reserve from even attempting to develop anything close to the Chinese digital RMB in order to protect citizen freedoms and liberties. Instead, U.S. lawmakers may push for legislation to establish a comprehensive regulatory framework for stablecoins issued by private companies. Last month, Senators Cynthia Lummis of the Senate Banking Committee and Kirsten Gillibrand of the Senate Agriculture Committee introduced the Lummis-Gillibrand Payment Stablecoin Act, which you can read more about in a previous Galaxy Research newsletter.
Assuming the U.S. and China continue to pursue different policies in the use of CBDCs and other digital currencies, China is likely to lead the innovation in CBDC infrastructure, while the U.S. leads the adoption of privately issued, USD-denominated stablecoins. As former CFTC Chairman J. Christopher Giancarlo said in an interview with CoinDesk, CBDCs may increasingly be used by countries that are subject to U.S. sanctions and seek to avoid them in the future as a means of governance. If the U.S. does not export its own CBDC network, it may have to maintain the core position of the U.S. dollar in the global financial system and compete in the new digital age through private, U.S.-based stablecoin issuers, which offers advantages in protecting financial privacy for U.S. citizens but also disadvantages in terms of capital efficiency. To learn more about the pros and cons of stablecoins, please read the Galaxy Research Digital Dollar Report. – Christine Kim
Chart of the Week
Last week, we focused on the total value of assets deposited into the EigenLayer and Karak platforms. This week, we narrow the scope to a subset of assets deposited into Karak, specifically the Liquid Re-Staking Tokens (LRT).
LRT represents tokenized claims to assets deposited into EigenLayer. Effectively, re-staking these LRT on Karak is akin to using EigenLayer deposits to secure Karak’s Active Validation Services (AVS). This idea is similar to the deposit dynamics of the Beacon Chain, where liquid staking tokens (LST) are deposited on re-staking applications to secure AVS. This has led to a trend incentivized by point programs that allow users to accumulate and increase points from various sources.
The chart below shows the trend of top-tier LRT deposited on Karak. As of Thursday, May 23, there are 66,500 of such LRT on the re-staking application. Magpie LRT is not included in the chart.
To build up these deposits, we can compare them to the total supply of the respective LRT. The chart below tracks the supply share of each LRT deposited on Karak. Among the observed LRT, Swell’s re-staking ETH, rswETH, has the largest supply share on Karak at 10.63%. Users depositing rswETH on Karak can earn points from the re-staking application itself, in addition to a triple multiplier on Swell points. Bedrock’s uniETH has the second-highest share at 6.5%, and depositors can earn a 1.5x multiplier on Karak points and a 5x multiplier on Bedrock points. The remaining LRTs have smaller supply shares on the re-staking application, ranging from 2% or less, but still enjoy a double points multiplier.
Other News
MetaMask Plans to Add Bitcoin Support
Phantom Wallet Surpasses PayPal, Ranks as Second Top App on Google Play Store
Trump Campaign Accepts Cryptocurrency Donations, Including Dogecoin and Shiba Inu
Hong Kong May Allow Pledged Ethereum Spot ETF
ZkSync Plans Token Generation Event This Week, Airdrop in Mid-June
Uniswap Labs Responds to Wells Notice, Calls SEC Lawsuit “Weak and Misguided”
Yuga Labs “Will No Longer Engage” with CryptoPunks Due to Strong Opposition to New Series
U.S. House of Representatives Passes Republican-Led Anti-CBDC Bill
London Stock Exchange to List Cryptocurrency ETP for the First Time
Tags: CBDC, DOGE, ETP, SEC, Ethereum, Bitcoin