Former SEC Senior Trial Counsel on Spot Ether ETF Approval Outlook

The fact that the SEC has asked people to update their forms and to do it on an expedited basis is somewhat surprising. And for those that hope that the SEC moves to a more accepting approach to digital assets, promising it's Tuesday, May 21st 2024. And this is Markets Daily a show where we get into the minds of some of the smartest and most experienced investors, traders, analysts, ceo lawyers or anyone with a smart or hot take on what's going on in the markets. I'm Jen San Asi. Now, before we get into our discussion today, we're going to take a look at what's going on in the crypto markets. Now, to everyone's surprise, including my own ether is up over 20% this morning at around $3800 and Bitcoin is up over $70,000. This is of course because we learned yesterday that the SEC has asked exchanges to update 19 B four filings for the E ETF applications ahead of a key deadline later this week. Now everyone thought that these were dead in the water and it's looking like speed is being picked up pretty quickly. So we're gonna unpack what could be going on there. I must note that Bloomberg Intelligence, ETF analyst, Eric Balchunas, who was also on this show last week. So go check that episode out has put the chances of this approval at 75%. That's up from 25%. But let's make sense of what's going on here with Moses singer partner, Howard Fisher. Howard. Welcome to the show. Thank you for having me. Ok. We're gonna just dive right into these ETF S in just a moment. But I gotta ask you right off the top. What's your call of the day? My call of the day is actually Coinbase because one of the things we saw when the SEC approved Bitcoin ETF S was that eight of the 11 ETF S that were approved custody assets at Coinbase. If there is going to be a similar kind of approval of Ether ETF S, we're probably gonna see something similar. So if this does go forward at the SEC and you know, I your your bet, your guess on that is as good as mine. If it does go forward, I think this is going to be very good for places that custody assets. So that would be my call of the day. I'm I'm curious to hear your thoughts from a legal perspective. You know, you just mentioned that Coinbase custody most of the assets for the majority of the Bitcoin ETF issuers from your perspective. Is it better to have one custodian oversee uh many of the products or is it better to have some diversity there? Well, that's one of the concerns that's come out after the Bitcoin ETF S were approved is that all of the eggs are effectively in one basket. If there is a problem with Coinbase, that's a problem for the industry. I mean, if you look at the traditional fund industry that have prime brokers, they have prime brokers all over Wall Street. And the concern is that if everyone is using the same institutions, risk to that institution is a risk to the entire industry. So that's probably more of a concern than if they were custody at a variety of different institutions. On the other hand, there is some concern with the stability of exchanges and Coinbase has proven that it is one of the more stable exchanges, notwithstanding its current battles with the SEC. So yeah, II I guess I've answered your question like any typical lawyer which is uh it depends. So I apologize for that. That's OK. I also answer any question I get about anything in this industry. It's a, it depends and then, and then an opinion that follows. OK, let's talk about what's going on with this uh with the E ETF S. You were at the SEC for nine years. What do you think is going on behind the scenes right now? Why the sudden progress? Well, III I it's a good question and I was trying to figure that out myself. I mean, it could be a bunch of things on one hand, maybe the SEC is picking its battles. Maybe it's saying that it's under so much political attack and pressure because of its very aggressive attitude towards digital assets that it figures. Ok. We'll throw the industry above will approve this just like we were forced to approve Bitcoin ETF S and that will show that we're even handed that we're not just hostile to the industry that we're just trying to app apply the law as we know it. So it could be that, uh it could also be that they've internally reached a decision that this digital asset is not a security and therefore, as a commodity like it did with Bitcoin, it wouldn't be inappropriate to, to approve an exchange traded product for it. Uh It could also be that, you know, maybe they figured out that they will probably lose a battle if this goes to court. I mean, you recall that the SEC didn't just change its mind on Bitcoin. It was forced to change its mind through judicial proceedings. So maybe the concern is they'd rather preemptively agree to something than establish a precedent which might be bad in court. I think what a lot of people are wondering though is why so suddenly and why so close to the deadline? It feels like something could have changed overnight or do you think that this is something that they were planning, they didn't want to maybe alert the markets and now we're getting super close to the deadline. So they had to take action. I don't think it's anything as underhanded or as calculated is that at all? Let me admit something as a former government enforcement agency official. Uh, sometimes things go down to the wire and they go down to the last minute and a lot of times people's focus gets concentrated in the last week or so before an official action has to be taken. It could be something as simple as that. All right, talk to me about these 19 B four forms just for those who are uninitiated. What are the significance of the changes that we're asking to make? The government is nothing but forms? I mean, I remember whenever we did an interrogation, we'd had to give someone what was known as a form 1662. And that meant that there were 1661 forms that came before that. And so not to get too complicated or technical about it, but there are various forms that need to be submitted and approved before any kind of ETF is approved for sale to the public. And so what's happened is that the SEC has asked applicants to update their forms, which is, as you said, very surprising because a lot of people were under the impression that this was dead in the water. So the fact that the SEC has asked people to update their forms and to do it on an expedited basis is somewhat surprising and for those that hope that the SEC moves to a more accepting approach to digital assets promising. Yeah, I know. I mean, we saw this before the approval of the spot, Bitcoin ETF S right, the SEC was engaging with the issuers, there were a lot of forms being updated, it seemed like things were moving. And so I think people are looking at this and thinking, hm maybe it could be the same. Now, I want to talk to you about another piece of news that came out this morning. Fidelity recently updated yet another form there s one to remove staking. Now given uh the S ECs views on Ether and how it's publicly said it views staking. Do you, do you think that the SEC could this is some speculation here? But do you think the SEC could approve the E ETF S and remove the staking piece and still kind of have that narrow uh view of seeing staking as a security so that they can continue on with some of the legal battles that that are going on? You know, that that's a good question. As you if you imply, the SEC has taken the view that most staking transactions are securities transactions and therefore they're subject to the registration requirements of the securities rules as well as the other rules as well. And so there is some question as to whether or not the fact that, um you know, the Ethereum Blockchain has moved towards staking uh rather than uh you know, proof of work as a means of validating transactions may be part of what the SEC is looking at these days. But again, uh it's really hard to tell and I'm saying this as a former sec person, uh sometimes it's very hard to tell what the thinking is. Find a lot of the acts that the SEC does. We just, you know that it's not like it's a black box. The commissioners do speak, they do talk about things, but they are also trying to navigate a very narrow path here. You know, on one hand, Chairman Gensler is very hostile digital assets. He said this and his approval of his statement when the SEC approved Bitcoin TFS was effectively, you know, we're gritting our teeth while doing this. You can't convince me this is anything useful for anything other than money laundering and terrorist operations. But, you know, courts are forcing my hand on this. So it's, you know, it's very hard to see if this is really a change of heart at the SEC, whether it's a pre emptive way of avoiding a court forcing them to do this or if it's simply something like, well, we have a deadline coming up so we gotta do what we gotta do. We gotta get it done in the next week or so. There are two ETF S who have deadlines coming up. Uh Maybe it's just as simple as bunches of people sitting down in a room around a conference table and say, OK, let's, let's just finalize this. I'm curious to hear from your perspective. Uh If you think we're going to get any clear legislation before the next elections and if you don't, do, we start at square one in the new year. What happens from here as we sit in this limbo of an election year? I mean, of course, it would be a lot easier for everybody if Congress just sat down and said, ok, here's how we're going to find digital assets. Here's what the rules here, what the regulations are and here's the regulator that's going to oversee this industry. That would be great. A lot of other countries have done that. But at this point, there's such a partisan divide on very key issues among them, who would be the regulator on one side of the aisle. The Republicans do not like Chairman Gensler and they would not agree to any kind of resolution that has the SEC as the regulator, even though Gensler is only going to be there for a couple of years more at the most. Uh On the other side, there are people who are concerned with giving regulation over to the CFTC or perhaps to a newly created self regulatory organization. So I don't think that there is enough of a connect there on both sides of the aisle to really get something before the election. If we get anything, it will be legislation on stable points. But anything broader than that, I am very pessimistic that we get anything before the election. And then even after the election, if the House and the Senate are controlled by different parties, no matter who the President is, we might not get agreement on legislation and Howard just before we wrap up from a legal perspective, what should crypto investors, the people who are listening to the show be aware of when it comes to their day to day trading. This is a very strange asset class because its valuation is not determined by certain fundamentals as much as by government intervention. Uh And we saw it with Bitcoin, the fact that the government approved Bitcoin eta led to a significant run up in those prices. So I think the one thing to look at is that this asset has an area of risk that many other assets don't. And that is that the way the government looks at it makes a very, very big difference in how it is valued, how it is transacted and who is allowed to transact it. And as you said, I don't think that's going to change. At least not before the election. Howard. It was a pleasure talking to you this morning. Thanks so much for joining the show. My pleasure. Always happy to do it.