The U.S. Securities and Exchange Commission (SEC) yesterday (14th) proposed rule changes for multiple applications, allowing cryptocurrency exchanges to trade ETFs for ETH Staking and in-kind purchases and redemptions. The SEC decided to postpone the decision to gain more time for evaluation. The originally scheduled decisions in mid-April have been delayed until early June this year.
Scope of Impact
SEC Assistant Secretary Sherry R. Haywood wrote in documents regarding the VanEck Crypto ETF that this indicates the regulatory body still maintains a highly cautious attitude towards these innovative mechanisms involving cryptocurrency derivatives.
The Commission believes it is appropriate to designate a longer period to take action on the proposed rule changes to have sufficient time to consider the rule changes and the issues they raise.
The main affected parties are two ETH-related investment products under Grayscale: Grayscale Ethereum Trust ETF and Grayscale Ethereum Mini Trust ETF.
On February 14th this year, NYSE Arca submitted rule change applications for these two trusts, hoping to allow Staking of their held ETH to earn additional income for investors. The original deadline was April 17th but has now been postponed to June 1st.
The changes submitted by Cboe BZX for VanEck Bitcoin Trust (HODL) and VanEck Ethereum Trust have also been delayed, with the application aiming to allow these two ETFs to adopt an "in-kind purchase and redemption" mechanism. The SEC was originally to decide by April 19th but has delayed it to June 3rd.
Additionally, the decision on the in-kind redemption mechanism for WisdomTree Bitcoin Fund has also been delayed to June 3rd.
Why are Staking and Physical Redemption Key?
Staking is a core function of Proof-of-Stake (PoS) blockchains like Ethereum, where holders can lock their tokens to validate blocks and receive corresponding rewards. If ETH spot ETFs could include Staking functionality, it means Staking-generated income could be distributed to investors, making an interest-bearing ETF very attractive to investors.
However, introducing Staking also brings more complex regulatory issues, such as the nature of Staking income, risk disclosure, and ETF structure impacts, requiring the SEC to carefully evaluate over a longer time.
In-kind purchase and redemption is a common ETF market operation mode, especially emphasized after multiple Bitcoin spot ETFs were approved in the U.S. earlier this year. Compared to cash creation/redemption, in-kind allows Authorized Participants (APs) to directly exchange Bitcoin or ETH for ETF shares, or ETF shares back to Bitcoin or ETH.
This mode is typically considered more efficient, with lower transaction costs and reduced tracking error, but for volatile cryptocurrencies, the in-kind delivery process, custody risks, and potential market liquidity impacts are aspects the SEC must carefully consider.
Market Expectations for ETH Falling Flat
The market was initially highly anticipating ETH spot ETFs with Staking functionality. However, even in the potential Trump era, authorities choose to cautiously approach the uncertainties of cryptocurrency product financialization. Compared to the January approval of multiple Bitcoin spot ETFs, market expectations for ETH spot ETFs have clearly cooled.
The main reasons might be whether ETH's mechanism could be classified as a security and the complexity of Staking and regulation brought by the PoS mechanism.
From early February's market anticipation of Ethereum Staking to now, Ethereum's price has been halved. The initial optimism likely mixed market expectations of spot ETF market impact, and recent pessimism reflects the disappointment of these expectations. To hope for a return to February's price and market conditions, spot ETF Staking and Ethereum's reforms might be indispensable.
Relative to uncertain regulation, Ethereum is also undergoing foundation reforms and the Pectra upgrade, currently scheduled to go online on 5/7 and potentially subject to further delays. Overall, Ethereum might need to wait until near June or await changes in the macroeconomic environment before showing signs of significant rebound.
