SEC’s Hester Peirce: Ethereum Staking for ETFs ‘Always Open for Reconsideration’
- The SEC has been cracking down on staking services offered by crypto platforms, raising concerns about their compliance with securities laws.
- This led to the removal of staking features from recent Ethereum ETF applications.
- Hester Peirce expressed openness to potentially allowing staking in future ETF applications.
- Withholding a significant portion of tokens from staking could compromise the security and decentralization of the Ethereum network.
As Ethereum ETFs prepare for their imminent launch, Hester Pierce, one of the few pro-crypto commissioners at the SEC, has left the door open for staking’s potential comeback.
In recent years, the SEC has cracked down on major players like Kraken, Coinbase, and MetaMask for their staking activities. This regulatory pressure has even led Ethereum ETF issuers, notably ARK21 Shares, to exclude staking components from their proposals to comply with the SEC’s stringent requirements.
Hester Peirce Open to Staking in Ethereum ETFs
Hester Peirce indicated that the inclusion of staking in Ethereum exchange-traded funds (ETFs) is “always open for reconsideration.” In an interview with Zack Guzman , Peirce discussed the possibility of revisiting the concept, which issuers recently excluded from their applications.
Peirce said :
“I think certainly something like staking, or any feature of the product — we saw that on the Bitcoin exchange traded products too, right? There were features of the product that some people would have liked to see included but weren’t — those are always open for reconsideration as far as I’m concerned.”
This discussion stems from the SEC’s previous approvals of Ethereum ETFs that did not include staking features, alongside the commission’s approvals of spot Bitcoin ETFs and recent applications by 21Shares and VanEck for spot Solana ETFs. Peirce’s remarks suggest a potential shift towards integrating more complex aspects of cryptocurrency operations into regulated financial products.
SEC’s Peirce Cautious on Solana ETP Applications
Commissioner Hester Peirce exercised caution when discussing the new Solana exchange-traded product (ETP) applications submitted by VanEck and 21Shares. Within the crypto community, there was hope that Solana ETPs could be approved by the SEC without the prerequisite of a well-established futures market on platforms like the Chicago Mercantile Exchange.
She commented :
“I think people need to look and see whether there have been other types of markets or other types of products where there hasn’t been a futures market underlying it, and then they can make the case based on that. We really have to look at that on a case by case basis. This environment with crypto is so difficult, of course, because there are questions around what my colleagues and I are going to think is a security and not.”
On a recent podcast, Matthew Sigel, the Head of Digital Assets Research at VanEck, suggested that alternative measures, such as surveillance-sharing agreements between cryptocurrency and stock exchanges, could effectively ensure market integrity without relying solely on futures markets.
SEC’s Shifting Stance
The removal of staking components from Ethereum ETF applications marks a significant shift in the SEC’s approach, reflecting the complex regulatory environment surrounding cryptocurrencies.
As issuers like ARK Invest and Fidelity amend their filings to exclude staking, they align with the SEC’s cautious stance on cryptocurrency staking services, which the commission often views as crossing regulatory lines and introducing potential complications.
This strategy appears to stem from ongoing concerns about the oversight of staking practices, which involve earning rewards through network participation.
ETH Staking An Investment Contract Under Howey?
Ethereum’s shift to a proof-of-stake consensus mechanism has prompted discussions on whether staking ETH could constitute an investment contract under the Howey test. The test suggests that staking ETH meets the criteria: (1) validators “invest money” by committing 32 ETH, (2) they participate in a “common enterprise” with others in the validation process, (3) with an expectation of earning profits from staking rewards, (4) which depend on the efforts of other validators.
However, the interpretation that Ethereum’s proof-of-stake model converts ETH into an investment contract may not hold up, particularly concerning the second and fourth prongs of Howey.
The argument fails to recognize the decentralized nature of Ethereum where no single issuer or promoter controls information flow, making the application of securities laws, in this case, both absurd and unnecessary. This perspective challenges the traditional understanding and application of the Howey test in the context of decentralized digital assets like Ethereum.
Why Does the SEC Dislike Staking?
The SEC has raised concerns that crypto staking resembles an investment contract, where investors commit their assets with the expectation of returns generated by the efforts of others, specifically the validators on the network.
This perspective highlights the potential risks involved when users transfer ownership of their tokens to third parties such as exchanges or networks—a common feature in all Ethereum ETF proposals.
The SEC’s apprehension revolves around the control and security of these assets once they are in the hands of another party.
However, by excluding staking from ETFs, a substantial portion of Ethereum’s supply may be withheld from the staking pool, which could negatively impact the network’s stability and security.
This exclusion could lead to a concentration of staking power within a smaller group of participants, undermining the fundamental principle of decentralization inherent to blockchain technology. Additionally, reducing the overall staking ratio on the Ethereum network could potentially compromise its performance and security, raising significant concerns about the long-term implications of such regulatory decisions.
Trump Revisits Pro-Crypto Policies
The timing of these discussions is crucial, especially with the upcoming US presidential election in November. Former President Donald Trump, a frontrunner who has adopted a pro-crypto stance, could significantly influence the regulatory landscape for cryptocurrencies if reelected.
Trump’s recent endorsement of Bitcoin, Bitcoin mining, and NFTs, coupled with his acceptance of crypto donations for his campaign, indicates a potential shift in Republican policy towards digital assets.
Spot Ethereum ETFs Won’t Need a Lawsuit, Says Hester Peirce, But What Will They Need?
