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SEC Approves Ethereum ETFs: Staking Removal to Thank? 

Published May 24, 2024 3:34 PM
Shraddha Sharma
Published May 24, 2024 3:34 PM

Key Takeaways

  • SEC’s approval of Ethereum ETFs may imply Ethereum is treated as a commodity.
  • Staking is not included in the approved Ethereum ETFs, raising questions about its status.
  • Analysts predict that the SEC might differentiate between ETH and Staked ETH.

The Securities and Exchange Commission (SEC) approved Ethereum ETFs by at least eight applicants, with no issuer allowing staking.While the approval is seen as a positive step for Ethereum, it also raises questions regarding the exclusion of staking from these ETFs.

Staking is a process where cryptocurrency holders lock up their coins to help maintain the network and earn rewards in return. For Ethereum, this involves participating in the network’s proof-of-stake (PoS) system. For regulatory purposes, the SEC may consider Ethereum different from staked ETH.

Ethereum ETFs With No Staking

Staking rewards incentivize holders to support the network, but its inclusion in financial products like ETFs could have complicated the process. The green light to Ethereum ETFs without staking likely reflects regulatory caution, leaving unresolved questions about Ethereum’s full regulatory status and the future of staking in cryptocurrency market.

Lawyer Jake Chervinsky underlines that  the SEC has not explicitly mentioned Ethereum’s status as a non-security, but their reference to “commodity-based trust shares” implies that Ethereum might be treated as a commodity and not a security.

However, the approval process explicitly avoids including staking, which Chervinsky suggests will be a separate issue to be addressed in the future.

JAN3 CEO Samson Mow argues  that Ethereum spot ETFs will significantly underperform Bitcoin ETFs due to the exclusion of staking.

According to Mow, “Compare demand in other markets where both exist and factor in that they will not give staking rewards,” making Ethereum spot ETFs less appealing.

Staking is a process where Ethereum holders can earn rewards by locking up their coins to help maintain the network. Since these rewards will not be part of the ETFs, debate is abuzz as to whether Ethereum ETFs are less attractive to investors who might otherwise benefit from staking directly.

Staked ETH Vs ETH

Bloomberg analyst James Seyffart believes  that the SEC might differentiate between Ethereum itself and staked Ethereum.

He said in a podcast with Bankless, “[SEC might] try thread this needle and say Ethereum itself, they’re not going to call a security but staked ETH might be a security, and I don’t believe they’re going to give that up any time soon.”

He suggests that while Ethereum might not be classified as a security, staked Ethereum could be treated as one. According to the analyst, for staking to be included in an Ethereum ETF, a new round of approval might be required from the SEC. Currently, the SEC does not allow staking in ETFs.

Seyffart has always been skeptical about the likelihood of staking being included in the initial approval of Ethereum ETFs. He recalls that during the initial discussions in late April and early May, there was concern about the SEC’s stance on anything potentially classified as a security, including staking.

According to the discussion, if staked Ethereum were classified as a security, it would create substantial regulatory complications, particularly concerning the Commodity Futures Trading Commission (CFTC) and the futures market.

The analyst explains that ETH Futures contracts are currently registered as commodities futures, so reclassifying staked Ethereum as a security could disrupt these markets.

He noted, “It opens up a massive can of worms with the CFTC, with the futures market, if they call it a security.”

Status of Staked ETH

Seyffart anticipates that the SEC will continue to delay making a definitive ruling on the classification of staked Ethereum. He points to ongoing lawsuits involving Coinbase and Kraken, which suggest that the SEC views staking as a security and is unlikely to change this position soon.

The analyst believes that regulatory clarity is essential and hopes that ongoing legislative changes in Congress might fasten this process.

Meanwhile, Matthew Sigel, head of digital asset research at VanEck, addressed  claims that Ethereum’s switch to proof-of-stake (PoS) was a securities transition. He argues, “Any claim that Ethereum’s move to proof-of-stake has turned it into a security, or that staking itself is a securities transaction is misguided and harmful to innovation.”

He noted, “This decentralized, community-driven process highlights that Ethereum remains a decentralized commodity, not a security, as its evolution reflects the collective agreement of its diverse global participants.”

Sigel also pointed out regulatory inconsistencies between the SEC and CFTC regarding Ethereum’s status, but he is optimistic about future regulatory clarity and further victories for digital assets due to improved political support.

A Step For Ethereum

The SEC’s approval of Ethereum ETFs is a major step forward for the asset. However, the exclusion of staking from these ETFs leaves some regulatory questions.

The removal of staked Ethereum from the approved ETFs likely facilitated the SEC’s approval by sidestepping the regulatory complexities associated with staking. The approval also reflects the SEC’s cautious approach to classifying staked Ethereum, which remains under scrutiny as a potential security.

With that, there is a need for clear regulatory guidelines as the market evolves, ensuring that future innovations in Ethereum and other cryptocurrencies can progress without legal uncertainties.

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