Hello and welcome to the FT Cryptofinance newsletter.
The arrival of exchange traded funds that invest in ether on US markets this week has thrown up the question: which cryptocurrency is next?
The common consensus is solana, which is based on the blockchain of the same name.
It is touted as a faster and cheaper rival to ethereum, and can be used to handle the high volumes of payments that traditional finance does routinely.
Summing up the excitement was traditional US fund manager Franklin Templeton — not a brand many people readily associate with crypto — which described solana as one of the “exciting and major developments that we believe will drive the crypto space forward”.
That is quite the endorsement for a token whose $82bn market capitalisation makes it — stablecoins excluded — the third-largest cryptocurrency, though it still represents only 3 per cent of the overall value of the crypto market.
Solana has been on a comeback from two years ago when it was known more for the frequency of its outages and being championed by Sam Bankman-Fried (who?). Now it is attracting the attention of two different crowds.
It is the go-to place to launch meme tokens based on dogs, animals or parodies of political figures — because it can handle the vast quantities of trading these coins attract. In recent weeks, some of its more traded tokens have been those following the fortunes of Kamala Harris and Joe Biden.
On the other hand, it is also being used to tokenise real-world assets such as US Treasuries. This week, Hamilton Lane, an investment manager with more than $920bn in assets, launched a private credit fund on the solana blockchain.
Now the Securities and Exchange Commission has a decision to make on a solana ETF by March next year. At the start of July, VanEck and 21Shares had filed applications with the SEC.
The rising confidence that this will pass stems from the SEC’s unexpected approval of ether ETFs in May. The industry had taken the lack of engagement from the agency as a clear signal that the host of applications would be turned down en masse, because ether could be used to earn a return, functioning very much like a security.
But the SEC sidestepped the problem, barring ETF issuers from earning a return; once that was overcome and the regulator approved them, a switch was flipped.
This change of heart doesn’t make a solana ETF a formality though. For many years, the SEC knocked back 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, went a long way to putting that concern to rest. However, there is no CME futures market for solana.
“It cannot be approved [by March] unless there is an acceptable surveyable market for the SEC and currently there isn’t one,” said Katalin Tischhauser, head of research at Sygnum Bank.
More troublingly, the SEC last year filed lawsuits against Binance US, Kraken and Coinbase alleging that solana is an unregistered security.
Even so, it is indicative of the crypto market’s morale that these are viewed not as insuperable hurdles but ones to be negotiated away.
The primary hope is that a victory for Donald Trump in November’s US presidential election leads to a change of tone at the SEC. The regulator last month closed an investigation into potential sales of ether as securities transactions, raising hopes it could also reverse its stance on solana.
Matthew Sigel, head of digital assets research at VanEck, confirmed on X that his company’s filing was a bet on a Trump victory. Legislation for crypto in Washington could also resolve the issue. But with a deadline of March, “a lot of things need to change and they have to change quite fast”, said Tischhauser.
But even if March is too soon, the question of a solana ETF represents an inflection point for both the industry and the regulator.
Bitcoin, it can be argued, is digital gold and worth holding for diversification and as a speculative asset. Ether is still the main play on the development of the crypto market as an alternative to the existing plumbing and infrastructure of the financial system. ETFs on both were more straightforward cases.
As the third-largest cryptocurrency, solana’s name is far less well-known outside the industry. After that is a very long tail of increasingly speculative projects with thinner liquidity and less maturity. That makes them less attractive as the basis for further crypto ETFs, and adds to regulators’ discomfort over the integrity of the underlying market.
Like ether, solana can also be used to earn a return so, in theory, the regulator should be comfortable with the concept. A successful application is likely to come down to market demand.
“There’s excitement as much for [solana] as a foundation technology as much as ‘I want something different for my portfolio’,” said Adam Levine, head of corporate strategy at Fireblocks.
But there have been two days of net outflows in spot ethereum ETFs in the first three days of trading, suggesting institutional interest is more muted.
What gave the spot bitcoin ETF applications unstoppable momentum was the applications of traditional names such as BlackRock and Fidelity. These names have been later in the market to file crypto-related ETF applications than others. They have not filed for a solana ETF and until they do, it is unlikely to appear.
What’s your take? Email me at philip.stafford@ft.com
Weekly highlights
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Crypto exchange Coinbase was fined £3.5mn by the UK regulator for providing payment services to more than 13,000 “high-risk” customers.
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Exchange traded funds that invest directly in ether arrived in the US this week and drew in about $108mn on 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. Still, early days.
Soundbite of the week
It’s the big bitcoin conference in Nashville this weekend, with the headline speech to be given by Donald Trump. The organisers had been in late talks to get Kamala Harris but she decided against attending. She’s probably suddenly trying to juggle a lot of things. Whatever the reason, some have taken this as a tremendous slight including Gemini exchange’s Tyler Winklevoss. Writing on X:
“The Biden-Harris Administration wages all-out war on the crypto industry for 4 years……What does she do? She declines. She can’t even take the first step and show up to start mending fences. Our industry won’t forget this. We will show no mercy in November.”
And finally . . .
It’s the Olympics opening ceremony tonight. The French will have to go some way to top James Bond and the late Queen Elizabeth II parachuting into the stadium. Bonne chance, mes amis.
Cryptofinance was edited by Tommy Stubbington. To view previous editions of the newsletter, click here
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