Many in the crypto market believe that a key change made to some applications for proposed spot-ether exchange-traded funds will be good for the ethereum blockchain while putting the prospective ETF products themselves at a disadvantage.
Issuers including Fidelity Investments and Ark Investment Management have eliminated plans for "staking" the ether they would purchase for the proposed funds if they're approved. Staking is industry jargon for the mechanism that runs ethereum and other so-called proof-of-stake blockchains. It involves locking up deposits of cryptocurrency in order to help validate transactions and secure the network in exchange for rewards paid for doing that work.
Staking has been a hot-button issue for ether since it allows holders to collect a yield, which raises questions about whether the token should be treated as a security that falls under the purview of U.S. regulators. Some market participants believe that if ETFs don't stake their tokens, the funds will be less appealing to investors than buying ether directly in the crypto market, where they are free to stake the tokens.
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"There will be an immediate opportunity cost to holding ether via a U.S. ETF from forgone staking rewards," said Brian Rudick, senior strategist at digital-asset firm GSR.
Ether prices have rallied about 20% over the past three days amid growing optimism that the SEC will approve at least one ETF by the regulator's Thursday deadline for a decision on VanEck's application.
The removal of the ETFs' plans for staking did not come as a surprise to many observers, since the regulator considers the essential mechanism of ethereum to be akin to crypto lending. Crypto exchange Kraken agreed to pay $30 million to settle SEC allegations that it broke the agency's rules by offering "staking as a service" products.
"For now, staking is seen as more of a security as staked ether offers yield," said Ayesha Kiani, chief operating officer of crypto hedge fund MNNC Group. "This is the best example of the cross intersection of decentralization and SEC standards." Owning ether without staking the tokens means the holder is not helping secure the blockchain, she added, "which is an issue because it would have given someone like Fidelity or VanEck a chance to contribute to the ethereum network."
At the same time, many industry advocates believe that the removal of staking plans among ETF issuers is actually a net positive for the industry, where the goal is a financial system that is decentralized rather than dependent on a small number of intermediaries.
"Staked ether being part of ETFs could have been a big centralizing force," said Leo Mizuhara, founder of decentralized-finance institutional asset manager Hashnote. "For example, the amount of bitcoin now in custody at Coinbase is enormous because of the ETF phenomenon. A similar thing could have happened with ETH staking."
Furthermore, he added, "centralizing forces in protocols like ethereum are also potentially destabilizing forces for the protocol should things go wrong. Because of this, I think it's net beneficial and stabilizing not to have staking in the ETFs."
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The fact that ETF issuers won't be staking ether likely aligns with ethereum's goals and will help protect the second-largest cryptocurrency from a "long-term institutional takeover," said GSR's Rudick.
Some are concerned that if ether ETFs are approved and become a huge success like bitcoin ETFs, which so far have attracted about $13 billion in net inflows, it will result in the issuers accumulating an alarmingly large amount of ether. Without them staking the ether, it could make the ethereum network more vulnerable to attacks. Right now about 27% of the all outstanding ether is staked, according to blockchain data firm Nansen.
"Only 27% of all ether is staked, so we all can and do live happily without staking, apparently," said MNNC's Kiani.
Still, some expect the ETF issuers will eventually get the regulatory clarity to stake the Eeher.
"I don't expect this to last forever," said Ryan Watkins, co-founder of Syncracy Capital. "With clearer regulation in years to come, these ETFs will eventually feature staking. The incentives are simply too high."
