Why did the US SEC reverse its attitude towards the spot Ethereum ETF? What will happen next?

On May 20, the US SEC began to inform funds to speed up the update of 19b-4 documents, indicating that the chances of spot Ethereum ETF being approved have increased. What does this mean?

On May 20, it was reported that the U.S. Securities and Exchange Commission asked exchanges to speed up the update of 19B-4 documents regarding spot ETH ETFs. This move has sparked speculation that the SEC has a more favorable attitude towards ETF applications before the approval deadline on Thursday.

While it’s not a done deal, Bloomberg ETF analysts Eric Balchunas and James Seyffart raised the odds of an ETH ETF being approved from 25% to 75%.

What is the reason? It is the dual pressure of politics and economy. This year is an election year, and the market demand for alternative assets such as cryptocurrencies is growing (see BTC ETF), which will become a positive catalyst for the cryptocurrency market.

The prediction markets (usually a bellwether for outcomes) reacted violently to the news: after a harrowing trend from 75% pass rate in January to 0%, we were back to 66% pass rate in just one hour.

Much of the market did not anticipate this given the SEC’s aggressive stance on cryptocurrencies, especially ETH. While the SEC itself has called ETH a commodity, a few like SEC Chairman Gary Gensler have consistently called it a security (given concerns about collateralization).

Not to mention Senator Elizabeth Warren’s outspoken stance on cryptocurrencies. More recently, Trump (in typical partisan fashion, of course) has leaned into embracing cryptocurrencies (despite past rhetoric to the contrary), citing the performance of his NFT collections.

So, what does this mean and what do we do next?

The last time we saw something like this was when the Bitcoin ETF was approved in January 2024, which led to a steady increase in the price of Bitcoin from $30,000 in November 23 to $46,000 in January.

This price trend usually marks mainstream financial acceptance of BTC/ETH as an asset class that the market wants to participate in, allowing the public to access the underlying cryptocurrency, bringing a lot of verification needs to the industry.

If there is strong demand for a spot ETF, the ETF must buy the underlying currency, unlocking exposure to the asset for a large group of investors who are not typical crypto people, crypto-savvy funds, family offices or speculators. ETFs are regulated, so they are "safer."

This is boring capital, orders of magnitude larger than the crypto capital we see today. These large pension/endowment funds have massive amounts of money (even 0.5% to 1% of that going to crypto is pretty significant for the crypto industry).

This is a good development considering the sideways price action over the last month and the debate over the demise of ETH.

Capital entering ETFs generally does not care about ETH's consistency, re-staking yield, decentralization, scaling, low float and high FDV debates. They do not trade on-chain, do not seek degen returns, and do not trade meme coins. But overall, they are definitely conducive to capital inflows and gaining attention.