Weekly Top Stories - 6/28

This week the newsletter, we write about a spot Solana ETF filing, the European Union's MiCA framework taking effect later this month, and the release of Ethereum's first production ready Reth execution client.

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Solana Trades Higher on ETF Application

VanEck files with SEC for spot-Solana ETP. VanEck filed an S-1 with the SEC to launch an exchange traded commodity-based trust product that plans to track the price of SOL by holding the underlying cryptocurrency, similar to the Bitcoin and (proposed) Ethereum ETPs. The VanEck Solana Trust S-1 filing is scant on operational details at this point, with no designation of custodian, administrator, cash custodian, authorized participants, or sponsor fee, though these can all be added in future amendments. The filing does notably say it will not stake the trust's assets. SOL traded about 8% higher shortly after the news.

Some interesting risk disclosures from VanEck's S-1 include: 1) a disclosure about concentrated ownership of Solana, in which VanEck says 100 wallets control 33% of the SOL in circulation (as of Nov. 29, 2023); 2) a disclosure that shareholders may not receive the benefits of airdrops or forked assets; 3) and a disclosure that the exit of validators could increase the risk of network attack. While VanEck has filed this S-1 with the SEC, at the time of writing at 5pm on Thursday, the firm hadn't yet filed a 19b-4, so there is not yet an official "clock" on when the SEC would need to make a final determination on approval/denial. That being said, assuming they file their 19b-4 imminently, "there are a few steps/gaps before the 240 day clock starts... but on average and standard procedure would put [the final date for SEC approval/denial] around March 15, 2025," Bloomberg's James Seyffart told Galaxy Research.

OUR TAKE:

Given that the Securities & Exchange Commission is currently alleging in its case against Coinbase that Solana is an unregistered security, absent a substantial change in posture from the SEC, it is likely that this application will be rejected. For better or worse, the precedent for the SEC approving spot-crypto exchange traded products (ETPs) is somewhat well established now: 1) launch regulated futures, 2) ETPs that hold those futures, 3) Canadian spot-ETPs (not clear if this is an actual consideration by SEC, but it happened), and then 4) spot-based U.S. ETPs can go forward. Both Bitcoin and Ethereum, assuming the ETH S-1s do go effective, followed this path.

Recall that the SEC's primary justification for denying the BTC ETP applications for years was that Bitcoin lacked a "regulated market of sufficient size with surveillance sharing agreements." For years, prospective issuers argued that the futures markets satisfied such requirements, but the SEC balked. To get around this problem, BlackRock's original June 2023 Bitcoin ETP filing included mention that BlackRock had entered into a surveillance sharing agreement with Coinbase, a spot-Bitcoin exchange. Ultimately, though, the primary ruling in the August 2023 unanimous D.C. Circuit Court of Appeals ruling against the SEC in Grayscale was that surveilling the futures market was sufficient to identify market manipulation because it was a) regulated, b) of sufficient size, and c) the prices of futures and spot Bitcoin were significantly correlated. The S-1 filers went back to saying they would do surveillance on CME futures, and the rest is history: all the Bitcoin spot ETPs went live in January 2024. Ethereum has followed a similar path and prospective issuers have copied the arguments from the Bitcoin process, leading to the approval of all spot-ETH ETP 19b-4s in May 2024. So, while somewhat arbitrary and determined by the SEC's original arguments for opposing a Bitcoin ETP, this process nonetheless has precedent.

In summary, the absent of SOL futures coupled with the SEC's legal stance that Solana is an unregistered security makes it very unlikely that such an application would be approved absent a major change in regulatory posture or legislation. On the last point, it's noteworthy that the FIT21 Act, which passed the U.S. House in May with 71 Democrats joining Republicans, does specifically outline a delineation between the authority of the SEC vs. the CFTC, providing clarity on which assets should be considered commodities vs. securities. That type of clarity could also materially affect or improve the odds of ETP approval for underlying digital currencies beyond Bitcoin and Ether. VanEck has a history of filing early: in the last round of Bitcoin ETPs, they were the fourth filer (filed one day after BlackRock), and they were the first to file for a spot Ethereum ETP. That's commendable - perhaps here they are betting on the outcome of the election. - Alex Thorn

MiCA's New Rules to Take Effect in EU

New rules from the European Union's Markets in Crypto Asset (MiCA) framework set to take effect on June 30. The EU's landmark legislation, which was approved and ratified last year, set new regulatory requirements that will impact crypto businesses and consumer access of the technology. Stablecoin issuers, in particular, will face a new set of stringent requirements starting next week including limits on transaction numbers and values.

Specifically, Article 23 says that companies must stop issuing stablecoins that are used as a means of exchange for more than 1 million transactions or a value greater than 200m euros (~$215m) a day. A consultation paper suggests that issuers can service Europeans without limitations when the tokens aren't a means of an exchange (e.g., p2p transactions and when crypto is exchanged for an e-money token). The caps are there "to safeguard the monetary system," according to a European Banking Authority spokesperson, who also told CoinDesk that a final report on how the EBA will measure transactions is likely by the end of the month.

In addition, stablecoin issuers will also need to have e-money licenses to legally operate in the EU, which have not yet been reported to have been obtained even by industry-leaders Circle and Tether. Other industry participants have expressed confusion over the unclear regulatory guidance. Outlier Ventures Head of Research Jasper De Maere told The Block that "no one has managed to find an elegant solution to implement the regulation," as the EBA only published its guidelines on technical standards last week. Meanwhile, exchanges like OKX and Bitstamp have delisted Tether's EURT euro-stablecoin ahead of MiCA's implementation, while Binance has alerted users that it will restrict the availability of Unauthorized Stablecoins for EEA users starting Monday next week.

OUR TAKE:

When the EU became the first major jurisdiction to pass comprehensive crypto law last year, some industry participants applauded the effort while criticizing the US for its hostile regulation-by-enforcement approach. Firms like a16z have expanded overseas, citing more predictable business environments than that in the US. However, with with MiCA's new rules set to go into effect next week, some industry participants are still left confused how to operate under the EU's framework that aims to provide 'regulatory clarity'.

The EBA's recently published standards have left little time to prepare for MiCA regulation and even the largest stablecoin issuers like Circle may not have the necessary licenses to operate across the region. Circle published a paper earlier this year, arguing that "the dual purpose of MiCA's significance regime - transfer of supervisory responsibility and introduction of increased prudential requirements - should be disentangled," though it's still unclear whether the EBA has effectively addressed those concerns.

MiCA remains a work in progress and only becomes partially applicable for crypto businesses on Monday - full compliance will be required by year-end. While many uncertainties still remain with its implementation next week, MiCA's rollout should encourage other jurisdictions to introduce or adapt existing laws to fit crypto market needs, especially here in the US. - Charles Yu

Paradigm Unveils First Production Ready Release of Reth

On Wednesday, June 26, Paradigm announced the first production ready release of Reth, a new Ethereum execution client written in the programming language Rust. After two years of development, the Reth client is now ready for use by node operators at scale for activities like staking. Reth boasts faster sync times and more minimal storage requirements than existing execution clients. The Reth team at Paradigm wrote in a blog post, "Reth 1.0's performance characteristic and storage footprint are as good as the beta versions as of June 2024 - about 50 hours to sync to the tip from genesis, ~2.25TB archive node storage, and great RPC throughput & latency in transactions, logs and tracing benchmarks. All of these numbers are state of the art and will continue getting better." The next major release of Reth will focus on supporting enhanced usability of the client by optimistic rollups. Additionally, the Reth team is focused on implementing all code changes slated for release in the next Ethereum upgrade, Pectra.

OUR TAKE:

There are now five actively maintained and production ready execution clients that users can choose from to connect to Ethereum. As the newest production ready execution client, Reth is the least widely adopted among the five. Geth, the oldest client, founded in 2014 and maintained by the Ethereum Foundation, is the most widely adopted. Though Geth is the most battle-tested execution client by far, Reth boasts unique optimizations and customizations that position the client well to quickly advance and surpass older clients in terms of user adoption in the years ahead.

In addition to Reth's fast sync times and minimal storage requirements, the team behind Reth is quick to add support for modifications to their client for specific end-users. For example, the Reth team has built OP-Reth so that the Reth client can be run by node operators connecting to Layer-2 rollups using the OP tech stack. They have also built support for execution extensions which empowers smart contract developers to run their applications directly inside of Reth so that these applications can more efficiently source information about on-chain events such as block reorgs.

The Reth team moves fast when it comes to adopting new features, which is an advantage that has its tradeoffs. New features often mean more surface area for potential bugs, while enhanced customizability of software can also mean more opportunity for misuse and mishandling by users. Even so, the fast-paced development of Reth is likely to position it well for adoption by application developers and blockchain service providers with the technical expertise to engage with the additional complexity of using this client, particularly for the benefit of enhanced support for niche use cases like operating a Layer-2 rollup or block explorer. - Christine Kim

Charts of the Week

There has been an elevated number of validators waiting in the Beacon Chain entry queue. Demand for restaking, and the reorganization of liquid restaking token collateral, has created demand for staking on Ethereum's Beacon Chain. This has led to a daily backlog ranging between 4,000 to 5,500 validators daily over the last month.

The churn limit on Ethereum throttles the number of validators that can enter or exit Ethereum's validator set on a daily basis. This creates a backlog of validators seeking to stake their ETH when demand to do so is high. The churn limit for the entry queue today is eight validators per epoch, or eight validators per 6.4 minutes. This means only 1,800 validators can leave the entry queue per day. The heightened number of validators looking to stake their ETH on Beacon Chain has kept the wait time to do so between two to three days for much of the last month.

Other News

• State Street partners with Galaxy tolaunchETFs

• Marathon Digital expands into altcoin mining to diversify revenue streams post-Bitcoin halving

• Julian Assange goes free after surprise plea deal with US government, receives $500k donation from anonymous Bitcoin whale

• Coinbase sues SEC, FDIC over FOIA requests, says federal regulators trying to cut out crypto

• Bitcoin Virtual Machine team rolls out ZK rollups service to scale Bitcoin

• Wallets allegedly linked to US government move 3,940 bitcoins to Coinbase

• Blast Foundation to disperse 17 billion BLAST tokens in this week's airdrop

• Solana Foundation releases Blinks feature to allow embedding Solana functionality into other web and social apps

• USDT stablecoin supply on TON blockchain crosses 500 million

• Bybit Card becomes available on Apple Pay

• Following presidential debate, Trump's odds of winning surge to 67% on blockchain-powered prediction market PolyMarket

• Supreme Court ends practice of in-house administrative tribunals at SEC, other federal regulators in ruling

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