Bernstein analysts doubt political influence in SEC’s spot Ethereum ETF approvals after Biden's veto

The narrative of a political shift being behind the Securities and Exchange Commission’s surprise approval of spot Ethereum ETH +0.67% exchange-traded funds last month is less credible after U.S. President Joe Biden vetoed a bill overturning SAB 121, according to research and brokerage firm Bernstein.

In May, the full House and Senate voted to repeal the SEC's staff accounting bulletin, also called SAB 121. The controversial bulletin establishes accounting standards for crypto custodians, making it unviable for Wall Street banks to custody crypto assets on behalf of clients.

Former President Donald Trump also recently hosted an event for people who bought his Trump “Mugshot” NFTs, going on record supporting crypto, accepting it for campaign donations and labeling Democrats and the Biden administration as anti-crypto. Trump subsequently pledged to free Silk Road creator Ross Ulbricht, stop central bank digital currencies (CBDCs) and support the right to crypto self-custody in a speech to the Libertarian Convention on May 25.

Those events led many in the industry to suggest spot Ethereum ETF approvals signaled a major shift in U.S. policy, with some sources suggesting there had been a change in tone from the Biden administration toward crypto.

However, in a letter addressed to the U.S. House of Representatives posted on the White House website on Friday — a day after Donald Trump was found guilty in his historic hush money trial — President Biden vetoed the SAB 121 repeal bill, stating, "My Administration will not support measures that jeopardize the well-being of consumers and investors." 

“Given the President vetoed the SAB 121 repeal bill, the political narrative looks less credible and likely SEC took a more pragmatic approach and avoided a legal battle,” Bernstein analysts Gautam Chhugani and Mahika Sapra wrote in a note to clients on Monday.

“[The] SEC knew it was in a corner on ETH ETF, with the same regulatory set-up as Bitcoin BTC +1.90% ETF (same spot/futures correlation and ETH futures live, CME ETH futures market already signifying commodity status),” the analysts added.

A court opinion in August 2023 gave Grayscale a win in its case against the SEC over the conversion of its GBTC Bitcoin Trust to a spot Bitcoin ETF — a key factor in the ultimate approval of such products in January this year.

The Bernstein analysts’ view is echoed by The ETF Store President Nate Geraci, who said Biden’s veto supported his theory that spot Ethereum ETF approval wasn’t driven by politics. “[The SEC didn't want to get sued and lose) again,” Geraci said . “[The] case for approval was pretty straightforward in my opinion.”

Spot Ethereum ETF flows expectation

The U.S. Securities and Exchange Commission approved 19b-4 forms for eight spot Ethereum ETFs from firms like BlackRock and Fidelity on May 23. However, the issuers still need to have their S-1 registration statements go effective before trading can begin — a process that could take days or weeks.

The Bernstein analysts said there should be “pent-up demand” from the same participants as the spot Bitcoin ETFs, but maybe with a lower allocation to the spot Ethereum alternatives. “Given ETH’s supply situation (staking, smart contracts, HODL data), ETH should see positive price action upon the ETF launch (expected next few days/sometime this month),” they added.

Major wirehouse support for Bitcoin ETFs expected this year

Sharing other learnings from the U.S Strategic Decisions conference in New York and Consensus in Austin last week, Chhugani and Sapra said Bitwise CIO Matt Hougan believes issuers are working hard to get the spot Bitcoin ETFs whitelisted with leading wealth advisors and national wirehouses.

“Matt [Hougan] believes over the next two quarters, the market should see an approval of Bitcoin ETF with a major wirehouse, which would allow these platforms to market Bitcoin ETFs to wealthy clients on an unsolicited basis,” they added. “This would bring back the momentum in flows, leading to another leg up for Bitcoin.”

The analysts also reiterated their view that the Bitcoin mining industry was headed for consolidation — highlighting Riot’s move to acquire nearly 10% of Bitfarms last week — as “only the scale players would have access to large capital to compete for land/power sites, given the increased competitive activity.”

Gautam Chhugani maintains long positions in various cryptocurrencies.