The U.S. Securities and Exchange Commission (SEC) yesterday (14th) proposed rule changes allowing cryptocurrency trading platforms to trade ETFs for ETH Staking and in-kind subscription and redemption. The SEC decided to postpone the decision to gain more time for assessment. 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. This indicates that the regulatory body remains highly cautious about 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.
Primarily affected are two Ethereum-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 generate additional income for investors. The original deadline of April 17th has been postponed to June 1st.
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 subscription and redemption" mechanism. The SEC was originally to decide by April 19th but has delayed it to June 3rd.
Additionally, the decision on WisdomTree Bitcoin Fund's in-kind subscription and redemption mechanism has also been delayed to June 3rd.
Why are Staking and In-kind Redemption Critical?
"Staking" is a core function of Proof-of-Stake (PoS) used by Ethereum, where holders can lock their tokens to validate blocks and receive corresponding rewards. If Ethereum spot ETFs can include Staking functionality, it means Staking-generated income can be distributed to investors, making an interest-bearing ETF very attractive.
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 assess for a longer time.
"In-kind subscription and redemption" is a common ETF market operation mode, especially after numerous Bitcoin spot ETFs were approved in the U.S. earlier this year. This mechanism allows Authorized Participants (APs) to directly exchange Bitcoin or ETH for ETF shares, or convert ETF shares back to Bitcoin or ETH.
This mode is typically considered more efficient, with lower transaction costs and reduced tracking errors, but for volatile cryptocurrencies, the delivery process, custody risks, and potential market liquidity impacts are aspects the SEC must carefully consider.
Market Expectations for ETH Positive Signals Fall Flat
The market was initially highly anticipating Ethereum spot ETFs with Staking functionality. However, even during the Trump era, authorities choose to approach the uncertain cryptocurrency financial products more cautiously. Compared to the approval of multiple Bitcoin spot ETFs in January this year, market expectations for Ethereum spot ETF market impact have clearly cooled.
The main reasons might be whether Ethereum'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 functionality 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 launch on 5/7 and potentially subject to further delays. Overall, Ethereum might need to wait until near June or await broader economic changes to show signs of significant rebound.
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