Cryptocurrency market bets on Solana ETF

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Hello and welcome to the FT Cryptofinance newsletter.

The arrival this week on the American markets of exchange-traded funds that invest in ether has raised the question: which cryptocurrency will be next?

The common consensus is solana, which is based on the blockchain of the same name.

It is being touted as a faster, cheaper rival to Ethereum, and can be used to handle the high volumes of payments that traditional finance regularly handles.

Traditional US fund manager Franklin Templeton, a brand few readily associate with crypto, summed up the excitement by describing Solana as one of the “exciting and major developments that we believe will drive the crypto space forward.”

This is a nice recognition for a token whose market capitalization of $82 billion makes it – stablecoins excluded – the third largest cryptocurrency, although it still represents only 3% of the overall cryptocurrency market value.

Solana made a comeback two years ago, when it was better known for its frequent outages and was championed by Sam Bankman-Fried (who?). It’s now attracting the attention of two different audiences.

It’s the perfect place to launch meme tokens based on dogs, animals, or parodies of political figures, because it can handle the vast trading volumes that these coins attract. In recent weeks, some of its most traded tokens have been those that track the fortunes of Kamala Harris and Joe Biden.

On the other hand, it is also used to tokenize real assets such as US Treasuries. This week, Hamilton Lane, an investment manager with over $920 billion in assets, launched a private credit fund on the Solana blockchain.

The Securities and Exchange Commission (SEC) must now make a decision on a Solana ETF by next March. VanEck and 21Shares filed applications with the SEC in early July.

The growing confidence in the move comes from the SEC’s unexpected approval of ether ETFs in May. The industry had interpreted the agency’s lack of commitment as a clear signal that the slew of applications would be rejected en masse, since ether could be used to generate yield, operating much like a security.

But the SEC got around the problem by prohibiting ETF issuers from generating a yield; once that problem was resolved and the regulator approved them, a switch was flipped.

This change of heart doesn’t make a Solana ETF a formality, however. For many years, the SEC has rejected Bitcoin Spot ETFs due to concerns about manipulation of the underlying market.

Bitcoin, and later Ether, futures markets on the CME, a federally regulated exchange, have gone a long way toward allaying this concern. However, there is no CME futures market for Solana.

“This cannot be approved [by March] “Unless there is a market that is acceptable and studyable for the SEC, which is not the case at the moment,” said Katalin Tischhauser, head of research at Sygnum Bank.

Even more troubling, the SEC filed lawsuits last year against Binance US, Kraken, and Coinbase, alleging that Solana is an unregistered security.

However, the fact that these obstacles are not seen as insurmountable obstacles but as obstacles to be overcome is indicative of the morale of the cryptocurrency market.

The initial hope is that a Donald Trump victory in November’s US presidential election will lead to a change of tone at the SEC. Last month, the regulator closed an investigation into possible sales of ether in securities transactions, raising hopes that it could also reverse its stance on Solana.

Matthew Sigel, head of digital asset research at VanEck, confirmed on X that his firm’s filing was a bet on a Trump victory. Cryptocurrency legislation in Washington could also address the issue. But with a March deadline set, “a lot of things have to change and they have to change pretty quickly,” Tischhauser said.

But even if March is too early, the question of a Solana ETF represents an inflection point for both the industry and the regulator.

Bitcoin, it can be said, is digital gold and is worth holding for diversification purposes and as a speculative asset. Ether remains the main player in the development of the cryptocurrency market as an alternative to the existing plumbing and infrastructure of the financial system. ETFs on both were simpler cases.

As the third-largest cryptocurrency, Solana’s name is much less well-known outside the industry. Then there’s a very long list of increasingly speculative projects, with lower liquidity and less maturity. This makes them less attractive as a basis for other crypto ETFs and adds to regulators’ unease about the integrity of the underlying market.

Like ether, solana can also be used to generate yield, so in theory, the regulator should be comfortable with the concept. The success of the application will likely depend on market demand.

“There is as much enthusiasm for [solana] “I want something different for my portfolio and a core technology,” said Adam Levine, head of corporate strategy at Fireblocks.

But there were two days of net outflows in spot Ethereum ETFs in the first three trading days, suggesting that institutional interest is more muted.

What has given the spot Bitcoin ETF applications an unstoppable boost are applications from traditional names like BlackRock and Fidelity. These names were later to the market than others in filing for crypto-related ETFs. They have not filed for a Solana ETF and until they do, it is unlikely that one will appear.

What do you think? Send me an email at philip.stafford@ft.com

Highlights of the week

• Coinbase Cryptocurrency Exchange was fined £3.5m fine by the UK regulator for providing payment services to more than 13,000 “high-risk” customers.

• Exchange-traded funds that invest directly in ether arrived in the United States this week and raised about $108 million. first day trading. BlackRock, Bitwise Investments and Fidelity emerged as the early leaders. Since then, there have been a few days of global outflows as the price of ether has fallen sharply. It is still early days.

Sound clip of the week

It’s the big Bitcoin conference happening in Nashville this weekend, with Donald Trump keynoting. Organizers were in talks to get Kamala Harris to attend, but she decided not to attend. She’s probably trying to juggle a lot of things. Whatever the reason, some took it as a huge snub, including Tyler Winklevoss of the Gemini exchange. In writing on X:

“The Biden-Harris administration has been waging an all-out war on the crypto industry for 4 years… What is it doing? It is refusing. It can’t even take the first step and show up to start repairing the damage. Our industry will not forget this. We will show no mercy in November.”

And finally . . .

Tonight is the opening ceremony of the Olympic Games. The French will have to do their utmost to surpass James Bond and the late Queen Elizabeth II. parachuting in the stadium. Good luck, my friends.

Cryptofinance was edited by Tommy Stubbington. To view previous editions of the newsletter, click on here

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