Politics, amendments, staking: Making sense of the ether ETF developments

As the industry tries to make sense of the evolving bullish signals around possible spot ether ETF approvals, there’s no shame in needing a quick refresher.

The Securities and Exchange Commission is expected to rule on such products by Thursday. With me so far?

Amended filings indicate that prospective ether ETF issuers would not stake the ETH they hold — a fund feature that segment observers long predicted the SEC to oppose.

The SEC has declined to comment.

Analysts expect the SEC to decide on so-called 19b-4s — proposed rule changes filed by exchanges on behalf of the issuers — before weighing in on S-1 registration statements for each of the planned funds. There could be a delay between the two actions, both of which are needed for the products to hit the market.

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Getting up to speed on accelerated movement

Various industry watchers had voiced pessimism of SEC spot ether ETF approval until yesterday, when Bloomberg analysts upped their odds of SEC approval from 25% to 75%.

To be fair, Coinbase research analyst David Han had said last week he thought the market might be “underestimating the timing and odds” of US ETH fund approvals.

One person familiar with the matter indeed told Blockworks on Monday: “Conversations are progressing.”

Indeed, the SEC reportedly asked the exchanges which spot ether ETFs would list to update their 19b-4 documents. SEC staff told the exchanges Monday that it was leaning toward approving the products, Barron’s reported, citing “people familiar with the matter.”

Jon Ammons, a partner in Reed Smith’s on-chain crypto and digital asset group, told Blockworks that the SEC has sometimes asked for 11th-hour modifications if a particular issue comes up late in the process.

“But I would say it is rare for them to sit on a known issue and then ask for changes at the last minute,” he added.

The SEC’s possible change of heart could be linked to recent political developments just months ahead of the presidential election. With former president Donald Trump essentially pledged to be a pro-crypto president, Democrats are likely feeling additional pressure to potentially pivot their stance on the issue, Galaxy CEO Mike Novogratz said last week.

Twelve Democratic senators joined Republicans last week to pass a resolution to overturn the SEC’s Staff Accounting Bulletin (SAB) 121.

Rashan Colbert, head of policy at dYdX Trading, said he expects the House to continue that momentum by passing the Financial Innovation and Technology for the 21st Century Act with a bipartisan majority this week.

And then there’s this about-face from the SEC.

“Those who’ve been deeply involved in crypto policy, who attempt to think about them from first principles, realize that these are not fundamentally partisan issues,” Colbert told Blockworks. “Some are attempting to make them so, but they’re not.”

Fidelity Investments amended the registration statement, or S-1, for its Fidelity Ethereum Fund Tuesday morning.

The filing signaled the firm intends to not stake the ether it holds. Staking ether is the process of depositing ETH to help secure the Ethereum blockchain — and earning yield on that ETH for doing so.

Fidelity’s adjustment came after Ark Invest and 21Shares, which previously proposed for their planned fund to stake the fund’s ETH, also took out such language in a May 10 filing.

Oh yeah, and NYSE Arca filed a 19b-4 on Tuesday on behalf of Grayscale for its Ethereum Mini Trust.

“Neither the trust, nor the sponsor, nor the custodian, nor any other person associated with the trust will, directly or indirectly, engage in action where any portion of the trust’s ether becomes subject to Ethereum proof-of-stake validation or is used to earn additional ether or generate income or other earnings,” the document states.

More similar 19b-4 and S-1 amendments are expected ahead of the SEC’s ruling.

Sumit Roy, a senior analyst at ETF.com, told Blockworks in March that it would be hard to imagine the SEC allowing potential ether ETFs to stake their holdings.

“Staking is a feature that makes ether and other proof-of-stake cryptocurrencies more like securities, which the SEC won’t look favorably upon,” Roy noted at the time.

So what does this mean?

Coinbase’s Han sought to explain the possible reason for the SEC’s previous lack of engagement with prospective ether ETF issuers in a Monday X post.

While staking would have made ether ETFs different than the already-approved bitcoin ETFs, he noted many details — like custodian responsibilities, net asset value calculation and benchmark rates, for example — are similar to those for the BTC funds.

“If there’s no staking, it’s not clear to me why spot ETH ETFs would be mechanically different from spot BTC ETFs,” Han added. “Hence, the relative silence on S-1 communication isn’t particularly surprising to me, since it’s not clear what would need updating.”

21Shares co-founder made a similar argument in a March interview with Blockworks co-founder Jason Yanowitz — pointing out the similarities between the approved bitcoin products and the ether ETF proposals.

“They’re the same structure, the same custodians, the same disclosures,” Snyder said at the time. “It’s very internally consistent. That means there’s less to look at.”

Still, the SEC could deny the spot ether ETF applications, particularly given the regulator’s historical hesitation to clearly label ETH as a security or a commodity.

“The SEC could therefore say that ETH ETPs should not be Commodity-Based Trust Shares,” Ammons said. “But this would likely ignite the jurisdictional tug-of-war between the SEC and CFTC over the classification of ether.”

SEC Chair Gary Gensler said in a Jan. 10 statement — the day the agency approved US spot bitcoin ETFs — that the decision was “cabined to ETPs holding one non-security commodity, bitcoin.”

Jake Chervinsky, chief legal officer at crypto fund Variant, noted that the SEC approving spot ether ETFs would likely mean they are admitting unstaked ETH is not a security.

“That would be a major policy move from a commission that has consistently refused to acknowledge any asset other than BTC as a non-security commodity,” he wrote on X. “Have we earned it?”

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