Crypto Market Takes a Stand on Solana ETF

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Hello and welcome to the FT Cryptofinance newsletter.

The arrival of Ether ETFs on U.S. markets this week has raised the question: what will be the next cryptocurrency?

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

It is advertised as a faster and cheaper competitor to Ethereum and can be used to handle the high volumes of payments that traditional finance typically handles.

Summing up the excitement was traditional US fund manager Franklin Templeton, a brand not many people easily associate with cryptocurrencies, who described Solana as one of the “exciting and important developments that we believe will move the cryptocurrency industry forward.”

This is a remarkable achievement for a token whose market capitalization of $82 billion makes it the third-largest cryptocurrency excluding stablecoins, although it still represents only 3 percent of the overall cryptocurrency market value.

Solana made a comeback two years ago, when she was best known for her frequent interruptions and being backed by Sam Bankman-Fried (who?). Now she’s attracting attention from two different groups.

It’s a great place to launch meme tokens based on dogs, animals, or parodies of political figures, because it can handle the large amounts of trades these coins attract. In recent weeks, some of its most traded tokens have been those following the fortunes of Kamala Harris and Joe Biden.

On the other hand, it is also used to tokenize real-world 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 must now make a decision on a Solana ETF by March of next year. VanEck and 21Shares filed with the SEC in early July.

The growing confidence that this will pass comes from the SEC’s unexpected approval of ether ETFs in May. The industry had taken the agency’s lack of commitment as a clear signal that the multitude of applications would be rejected en masse, because ether could be used to earn a return, functioning much like a stock.

But the SEC sidestepped the issue by preventing ETF issuers from earning a return; once they overcame that and got regulator approval, things changed.

This change of direction does not make a Solana ETF a formality. For many years, the SEC rejected spot bitcoin ETFs on the grounds that it had concerns about manipulation of the underlying market.

Bitcoin and, later, ether, futures markets at the CME, a federally regulated exchange, have done much to put this concern to rest. However, there is no CME futures market for solana.

“It cannot be approved [by March] “Unless there is a market that is acceptable and explorable for the SEC, and there currently isn’t one,” said Katalin Tischhauser, head of research at Sygnum Bank.

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

Nonetheless, it is indicative of the ethos of the cryptocurrency market that these are not seen as insurmountable obstacles, but as obstacles to be overcome.

The main hope is that a Donald Trump victory in November’s U.S. presidential election will lead to a change of tone at the SEC. The regulator last month closed an investigation into potential ether sales as securities transactions, raising hopes that it might also reverse its stance on Solana.

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

But while March is still too early, the issue of a Solana ETF represents a turning point for both the industry and the regulator.

It can be argued that Bitcoin is digital gold and is worth holding for diversification and as a speculative asset. Ether is still the main play on the development of the cryptocurrency market as an alternative to the current plumbing and infrastructure of the financial system. ETFs on both were simpler cases.

As the third largest cryptocurrency, solana’s name is much less known outside the industry. After that, there is a very long tail of increasingly speculative projects with thinner liquidity and less maturity. This makes them less attractive as a basis for additional crypto ETFs and increases regulators’ unease about the integrity of the underlying market.

Like ether, solana can be used to generate returns, so in theory the regulator should be comfortable with the concept. A successful application will likely depend on market demand.

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

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

What gave spot bitcoin ETF applications an unstoppable momentum were applications from traditional names like BlackRock and Fidelity. These names were later to the market to file cryptocurrency-related ETF applications than others. They have not filed for a solana ETF and until they do, it is unlikely to appear.

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

Highlights of the week

• Coinbase Cryptocurrency Exchange he was fined £3.5m fine from UK regulator for providing payment services to over 13,000 ‘high-risk’ customers.

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

Soundtrack of the week

The big bitcoin conference is coming up in Nashville this weekend, with Donald Trump giving the keynote address. Organizers had been in talks to have Kamala Harris, but she decided not to attend. She’s probably trying to juggle a lot of things all of a sudden. Whatever the reason, some people have taken it as a huge snub, including Tyler Winklevoss of Gemini Exchange. Write on X:

“The Biden-Harris administration has been waging all-out war on the crypto industry for 4 years… What do they do? They refuse. They can’t even take the first step and show up to start healing. Our industry won’t forget this. We will show no mercy in November.”

And finally . . .

Tonight is the opening ceremony of the Olympics. The French will have a long way to go 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 Here

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