Interpreting the Shift in U.S. Democratic Party's Crypto Policy: Voting to Overturn SAB 121, Signaling Positive News for Ethereum ETF

In the early hours of today, the SEC made a shocking reversal on its stance towards the ETH spot ETF. Prior to this, the Democratic Party had already quietly changed its attitude towards cryptocurrency.

On May 16, some Democratic senators in the U.S. Senate teamed up with Republican senators to vote to repeal SAB 121, a bill that established accounting standards for companies that custody cryptocurrencies, meaning banks that custody cryptocurrencies must also hold corresponding cash. Although President Biden previously stated he would veto the bill to keep SAB 121 in place, overturning SAB 121 might just be a matter of time.

SAB 121 sends a key signal: some Democratic senators who have been following Senator Elizabeth Warren's lead on financial and tech matters have now broken with Warren, opposing the SEC's overreach. This could signify a major shift in the Democratic Party's cryptocurrency policy.

As cryptocurrency becomes an increasingly important issue in U.S. elections, on May 21, the SEC also made a 180-degree turn in its attitude towards the Ethereum spot ETF, urging exchanges to expedite updates to their 19b-4 applications. May 23 is the first deadline for a series of proposed spot Ethereum ETFs, with VanEck's application at the forefront. Some believe that if the SEC rejects the Ethereum ETF, it could signal the current administration's unfriendly stance towards cryptocurrency, potentially causing the Democratic Party to lose more trust in swing states in the future.

Banks Custodying Cryptocurrencies Must Hold Corresponding Cash, SAB 121 Criticized

On May 16, the U.S. Senate voted 60 to 38 to overturn the SAB 121 rule. President Biden will vote on it in the coming days, marking the first cryptocurrency bill to be submitted for presidential approval. This is seen as a signal that the SEC's stance is not supported.

Why is SAB 121 criticized? First, the SEC's Staff Accounting Bulletin No. 121, issued in 2022, requires digital asset custodians to treat digital assets as liabilities and list them at fair value on the balance sheet. According to Avichal, co-founder of crypto asset management firm Electric Capital, SAB 121 has many issues, the biggest being that if a bank custodies $1 billion worth of Bitcoin for clients, they must hold $1 billion in cash to offset this "liability" on the balance sheet. Users find this unreasonable as these assets are not the bank's but the clients'.

SAB 121 is clearly intended to exclude banks from the crypto market, leading to reduced protection for clients. It also conflicts with the guidance of the Office of the Comptroller of the Currency (OCC).

On May 9, 21 Democrats in the House teamed up with Republicans to pass a bill to overturn SAB 121. On May 16, the Senate passed the bill with a 60 to 38 vote, including a yes vote from Senate leader Chuck Schumer. The bill now goes to President Biden for signing or veto. He has indicated he may veto it.

Notably, Democrats have been following Senator Warren's lead on financial and tech matters. Breaking with Warren, including leaders, they oppose the SEC's overreach.

This sends a clear signal to Senator Warren, President Biden, the SEC, and the market. Avichal believes the Democratic Party has made it clear they will take a centrist stance on market and financial regulation issues, moving away from the far-left stance. For those watching swing state elections, this situation is expected.

Avichal states several reasons prompted the Senate to agree to repeal SAB 121: first, Congress and Senate Democrats better understand the importance of cryptocurrency; second, the efforts of many behind-the-scenes individuals and groups; third, an interesting and ironic alignment of interests between banks and the crypto industry.

Government insiders like Senators Gillibrand, Lummis, Booker, Representatives Ritchie, Patrick McHenry, French Hill, and many others have been working to convince their colleagues that opposing cryptocurrency is detrimental to the U.S.

So, how did banks help the crypto industry? They called their contacts in Congress and the Senate, explaining why SAB 121 is a bad rule. Out of self-interest, banks are eyeing the historical revenues created by companies like Fidelity, BlackRock, Bitwise Invest, Coinbase, Anchorage, and Circle. They now realize that cryptocurrency could generate real revenue for them and don't want to be left on the sidelines.

However, this doesn't mean banks are now allies. If President Biden chooses to veto, SAB 121 may remain in effect. In the long run, Avichal states that crypto industry practitioners believe its repeal is only a matter of time.

Cryptocurrency Becomes an Election Issue for the First Time, Democrats Signal Through Ethereum ETF

Cryptocurrency has become an issue in the presidential election for the first time.

On May 9, Trump told cryptocurrency supporters at Mar-a-Lago that they "better vote" for him because the Biden administration has imposed strict regulatory crackdowns on the industry. "They are against it," he said at an event promoting his NFTs.

As Trump accepts political donations in cryptocurrency, the crypto industry is exerting increasing influence. Crypto super PACs are preparing to spend over $80 million to influence Congress and ensure more favorable policies.

Currently, the latest signal of the Democrats' softened stance is an email revealed by POLITICO on May 20, sent by Democratic leaders to House members, indicating that the party did not urge members to vote against the Republican-led "21st Century Financial Innovation and Technology" bill (FIT21) and the "Digital Currency Centralization Anti-Surveillance State Act" (H.R. 4763 and H.R. 5403).

Additionally, according to CoinDesk, three informed sources stated that the U.S. SEC has asked exchanges to expedite updates to their 19b-4 applications, indicating they might approve these applications before the critical May 23 deadline.

On May 21, Bloomberg ETF analyst Eric Balchunas stated: "James Seyffart and I are raising our odds of a spot Ethereum ETF approval to 75% (up from 25% to 75%), hearing this afternoon that the SEC might do a 180-degree turn on this issue (becoming increasingly political), so now everyone is scrambling (like us, others thought they would be rejected)."

Variant Fund's Chief Legal Officer Jake Chervinsky, upon hearing this news, stated: "If the spot ETH ETF is approved, it will shock everyone I know in Washington involved in this process. This doesn't mean it won't happen. It means the approval could signify a major shift in U.S. cryptocurrency policy after the SAB 121 vote, perhaps more important than the ETF itself."

What are the current cryptocurrency voter polls? According to a poll conducted by the Crypto Council for Innovation last December, 41% of crypto user voters would choose President Biden, while 51% would choose former President Trump as their next U.S. president.

"Crypto voters are not just a niche group; they are a diverse and influential group that could shape the 2024 election landscape," said Brett Quick, head of government affairs at the Crypto Council for Innovation, in a statement. "This underscores the need for nuanced, informed policymaking, as these priorities could tip the scales in a competitive election."

It now appears that to win over crypto user voters and swing states, U.S. politicians need to devise more strategies.

　　Disclaimer: Includes third-party opinions. No financial advice. See Risk Warning.