Introduction

The U.S. Securities and Exchange Commission’s (SEC) 180-degree turn on Ethereum spot ETFs has given the market more hope for the approval of more crypto asset ETFs. According to industry insiders, at least three asset management companies will start trading Ethereum spot ETFs from July 23. The market is now focusing on the next possible wave of crypto asset ETFs, with Solana (SOL) considered very likely to be the third approved crypto asset ETF after Bitcoin and Ethereum spot ETFs, sparking widespread discussion. This article will analyze the application process, advantages and disadvantages, the likelihood of SEC approval, and future prospects for the SOL ETF.

1.Market Performance of Bitcoin Spot ETF

The approval process for Bitcoin spot ETFs has been long and tortuous. On January 11, 2024, BlackRock launched the world’s first Bitcoin spot ETF (IBIT), marking the official entry of Bitcoin spot ETFs into the mainstream financial market. The launch of IBIT not only provided investors with a regulated investment channel but also greatly enhanced market trust in Bitcoin. The market performance of the Bitcoin spot ETF has been outstanding, with funds flowing in rapidly. As of July 16, the total net asset value of Bitcoin spot ETFs reached $56.72 billion. According to BlackRock’s second-quarter financial report released on July 15, assets under management reached $10.65 trillion as of June 30, with net inflows of $139 billion in the first half of this year. Since the launch of IBIT on January 11, BlackRock has become the world’s largest Bitcoin spot ETF. IBIT currently holds 316,276 bitcoins, worth about $18.3 billion. The issuance and outstanding performance of the Bitcoin spot ETF have laid a good foundation for the future development of crypto asset ETFs. The success of the Bitcoin ETF not only shows the strong demand for Bitcoin in the market but also demonstrates the potential of crypto asset ETFs in attracting investors and driving market growth, providing strong support for the launch of other crypto asset ETFs.

2.Progress of Ethereum Spot ETF

After the success of the Bitcoin spot ETF, market attention gradually shifted to the Ethereum spot ETF. On May 23, the U.S. Securities and Exchange Commission (SEC) approved the Form 19-b submitted by the issuer, allowing the Ethereum spot ETF to trade on U.S. exchanges, taking the first step in issuing the Ethereum spot ETF. A total of eight asset management companies are vying for the approval of the Ethereum ETF, including BlackRock, Grayscale, Fidelity, ARK 21Shares, Invesco Galaxy, VanEck, Hashdex, and Franklin Templeton. According to Reuters, three industry insiders said the U.S. Securities and Exchange Commission (SEC) has preliminarily approved at least three asset management companies to start trading Ethereum spot ETFs from July 23, likely to receive SEC approval on the afternoon of July 22, with related products expected to begin trading the next day. Analysts expect the Ethereum spot ETF to attract great interest from investors and could draw in as much as $10 billion in new funds within months of its launch. Tom Dunleavy, managing partner at MV Global, predicts: "We saw Bitcoin inflows reach $15 billion, and I think the inflows for the Ethereum ETF could be between $5 billion and $10 billion." Although Ethereum’s market performance has risen compared to Bitcoin ETFs, it has not yet reached its previous market cap high. However, the launch of the Ethereum ETF is still an important market milestone, providing a reference for future cryptocurrency ETF applications.

3.SOL ETF Application Kicks Off

As Bitcoin and Ethereum spot ETFs are approved one after another, the market’s attention gradually shifts to the Solana (SOL) ETF. On June 28, VanEck and 21Shares successively announced that they had submitted Solana ETF S-1 applications to the U.S. SEC, with VanEck even releasing an open letter explaining the move. Market rumors also suggest that BlackRock may also be applying for a SOL ETF.

On July 8, 2024, the Chicago Board Options Exchange submitted a 19b-4 document to the U.S. Securities and Exchange Commission (SEC), with asset management firms VanEck and 21Shares planning to list and issue Solana spot ETFs. The submission of this document marked the formal entry of the SOL ETF into the approval process. According to regulations, the SEC needs to give a review opinion on the 19b-4 document submitted by the Chicago Board Options Exchange within 240 days (expected by March 2025).

Since the application news broke, the SOL market has performed positively. On June 28, SOL prices rose by 7%, and on July 8, when the 19b-4 document was submitted, SOL prices rose again by 8%. This indicates the market’s expectation and optimism for the SOL ETF.

4.Analysis of Favorable Factors for SOL ETF Approval

4.1 Technical and Application Advantages

The Solana blockchain adopts a unique Proof-of-History (PoH) consensus mechanism, enabling it to handle higher transaction throughput with very low transaction fees. SOL’s high performance and low cost make it competitive in decentralized finance (DeFi) and non-fungible tokens (NFTs), making it an attractive investment target.

4.2 Strong Market Demand

As one of the top five crypto assets by market cap, SOL has broad market demand, sufficient market depth, and the potential to issue an ETF. The SOL ETF will attract investors interested in emerging crypto assets, offering diversified investment options beyond Bitcoin and Ethereum products.

4.3 Institutional Support and Investor Interest

The application for the SOL ETF has received support from several institutional investors, including VanEck and 21Shares. The participation of these institutions shows the market's high trust and expectations for SOL. Institutional investor support is a crucial driving force for the approval of the SOL ETF.

4.4 Promotion by the FIT21 Act

On May 22, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT21) by a vote of 279 to 136, showing strong political support and increasing the likelihood of the Act being enacted into law. The FIT21 Act aims to amend existing securities and commodity regulatory regulations to establish a clear regulatory framework for digital assets. The Act stipulates the regulatory authority of the CFTC and SEC, clarifying that decentralized tokens are digital commodities regulated by the CFTC, while non-decentralized tokens are securities regulated by the SEC. This classification helps resolve existing regulatory disputes, clearing the way for the ETF applications of crypto assets like SOL.

5.Analysis of Unfavorable Factors for SOL ETF Approval

5.1 Regulatory Challenges and Legal Risks

The SEC has identified SOL as a security in several lawsuits, posing a significant obstacle to the approval of the SOL ETF. In previous lawsuits against Coinbase, Kraken, and other companies, the SEC explicitly stated that SOL is a security, which in the U.S. must meet a series of stringent regulatory and disclosure requirements, increasing the compliance costs and complexity for the SOL ETF. In these lawsuits, tokens classified as securities also included BNB, BUSD, ADA, MATIC, ATOM, FLOW, ICP, and 18 other tokens. These tokens are unlikely to be approved as ETFs in the short term.

5.2 Lack of a SOL Futures Market

Both Bitcoin and Ethereum spot ETFs were approved with an existing futures market, and their futures ETFs had been operating for some time and performed stably, further supporting the maturity and stability of the spot market. However, SOL lacks a futures market. Jake Chervinsky, Chief Legal Officer of Variant Fund, stated: “I guess the U.S. Securities and Exchange Commission will reject the SOL ETF application due to the lack of a futures market.” Dragonfly Capital Partner Hasseb Qureshi said there are better reasons to prove that BTC and ETH-based ETFs meet the SEC’s market monitoring requirements because these assets have a well-developed futures market, but without a listed futures market, it is impossible to meet market monitoring standards.

5.3 Decentralization and Transparency Issues

Solana is not as decentralized as Bitcoin and Ethereum. Especially previously, FTX held a large amount of Solana, increasing its centralization risk. The FIT21 Act distinguishes between securities-based cryptocurrencies and commodity-based cryptocurrencies. Securities-based cryptocurrencies are under the jurisdiction of the SEC, while commodity-based cryptocurrencies are under the jurisdiction of the CFTC. The classification is based on the degree of decentralization of the cryptocurrency, defined as no single entity being able to control the entire blockchain network, and no single entity holding more than 20% of the digital assets or voting rights.

5.4 Market Competition and Liquidity Risks

Bitcoin is regarded as digital gold and a store of value, while Ethereum is synonymous with blockchain technology due to its wide application in smart contract platforms. In contrast, SOL, as a relatively new digital asset, has lower market recognition and trust. Investor confidence and participation are relatively insufficient, which may affect the market performance of its ETF. Although SOL ranks high in market cap, its market depth and trading volume are still far below Bitcoin and Ethereum. This means that the SOL ETF may face liquidity shortages, especially during significant market fluctuations, making it more susceptible to price manipulation and severe volatility.

6.Impact of Solana ETF Approval

6.1 Direct Impact on the Solana Ecosystem

The launch of the SOL ETF will drive the overall development of the Solana ecosystem, with more funds flowing into the Solana ecosystem, promoting the development of new projects and the expansion of existing projects. This will attract more developers and investors, further enhancing Solana's competitiveness in the blockchain field. Tokens within the Solana ecosystem are expected to see significant price increases. This upward trend will not only affect SOL itself but also other tokens within the Solana ecosystem.

6.2 Impact on the Cryptocurrency Market

More crypto asset ETFs will be launched: The launch of the SOL ETF will inspire other crypto assets to seek ETF approval, further enriching the investment products in the cryptocurrency market. The market will see more types of cryptocurrency ETFs emerge, promoting market competition and innovation. The launch of new cryptocurrency ETFs will provide investors with more options, increasing market liquidity and activity. Market volatility and investment risks: Although the approval of the SOL ETF will have a positive impact, it may also cause market volatility and investment risks. The cryptocurrency market itself is highly volatile, and the launch of the SOL ETF may further amplify this characteristic, especially during significant changes in market sentiment.

6.3 Impact on Legal and Regulatory Framework

The approval of the Solana ETF will prompt regulatory authorities to further improve the regulatory framework for digital assets. If the FIT21 Act becomes law, it will establish clear regulatory standards for digital assets, further promoting the legalization and standardization of the cryptocurrency market and fostering healthy development in the crypto industry. More and more institutional investors entering the cryptocurrency market through ETF products will help enhance the overall trust and transparency of the market. This will attract more traditional investors to the cryptocurrency market, expanding the market size and depth.

7.Assessment of the Likelihood of Solana ETF Approval and Future Prospects

In the short term, the SOL ETF remains uncertain. Despite SOL's significant advantages in technology and applications, and the support from institutional investors, it still needs to overcome issues related to its classification as a security, market recognition, liquidity, decentralization, and transparency. In the future, with the advancement of the FIT21 Act and changes in the political environment, the approval process for the SOL ETF will become clearer. The SEC needs to make a decision on the SOL ETF application within the next 240 days. Future regulatory trends and market reactions will be key factors influencing the success of the SOL ETF.

With the upcoming U.S. presidential election, the political push behind the approval of the SOL ETF cannot be ignored. Both the Republican and Democratic parties are actively vying for the votes of cryptocurrency supporters. Trump and Biden have both expressed support for cryptocurrencies to varying degrees. Trump has publicly pledged to protect the future of Bitcoin and cryptocurrencies and to stop the Biden administration’s crackdown on cryptocurrencies. Although the Biden administration initially had a tough stance, it has gradually shown a more moderate attitude towards cryptocurrency regulation. The public support from Trump and the policy adjustments by Biden indicate that the cryptocurrency industry may benefit regardless of who wins.

In conclusion, under the current political environment and the support of the FIT21 Act, the approval of the SOL ETF has certain possibilities but still needs to overcome challenges in regulatory compliance and market recognition. Regardless of the final outcome, the application for the SOL ETF has already initiated new market discussions and provided valuable experience and reference for the future launch of more crypto asset ETFs.

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