The Legislative Move
On May 10, 2024, ARK Invest and 21Shares submitted a revised registration statement to the U.S. Securities and Exchange Commission (SEC) for their joint spot Ethereum ETF product, removing a critical provision that would have allowed the issuer to stake a portion of the fund’s assets. The amendment quietly eliminates language stating the issuer “may, from time to time, stake a portion of the Trust’s assets through one or more third-party staking providers.”
The move comes just days before the SEC’s final decision deadline on the ARK 21Shares Ethereum ETF application and signals a strategic concession by the issuers. Staking — the process of locking cryptocurrency on a proof-of-stake blockchain to earn rewards while supporting network operations — has been a persistent sticking point for regulators who view it as potentially triggering securities classification under the Howey Test.
Bloomberg senior ETF analyst Eric Balchunas noted on social media that the amendment may not reflect productive engagement from the SEC. “While it may seem like this is them getting their documents in shape based on SEC comments, there hasn’t been any comments. So it’s probably either a Hail Mary or maybe trying to give SEC one less thing to use in their rejection,” Balchunas wrote.
Jurisdiction Context
The staking removal must be understood within the broader regulatory landscape shaping crypto ETFs in 2024. When the SEC approved 11 spot Bitcoin ETFs in January, it established a precedent — but one carefully circumscribed to avoid endorsing any yield-generating mechanisms. Bitcoin’s proof-of-work consensus model gave regulators a comfortable distance from securities concerns.
Ethereum’s transition to proof-of-stake in September 2022 fundamentally changed the equation. The SEC has repeatedly signaled that staked assets may qualify as investment contracts, particularly when third-party providers offer yield as a service. This position has been reinforced through enforcement actions against Kraken (which paid $30 million to settle staking-related charges in February 2023) and ongoing litigation against Coinbase’s staking program.
The SEC’s jurisdiction over Ethereum remains contested. Chair Gary Gensler has maintained that most cryptocurrencies — including potentially ETH post-Merge — qualify as securities, though the Commission has not formally classified Ethereum itself as such.
Industry Reaction
The crypto industry’s response to the ARK-21Shares amendment has been mixed. Some analysts view the staking removal as a pragmatic step that improves the odds of approval, however slim. Others see it as a sign that issuers are grasping at straws in the face of an agency determined to reject spot Ethereum products.
Balchunas has maintained a pessimistic 25% approval probability for spot Ethereum ETFs. “The lack of engagement seems to be purposeful vs. procrastination. No positive signs or intel anywhere you look,” he stated, tempering any optimism the filing revision might have generated.
The staking concession also raises questions about the competitive dynamics among ETF applicants. Fidelity, BlackRock, VanEck, and several other asset managers have pending spot Ethereum ETF applications. None of these firms initially included staking provisions in their original filings, suggesting ARK and 21Shares may have been outliers in their initial approach.
Compliance Hurdles
Even without staking, the path to Ethereum ETF approval faces significant obstacles. The SEC has cited concerns about market manipulation, surveillance-sharing agreements, and the adequacy of the underlying ETH market structure — the same framework it eventually overcame for Bitcoin ETFs, but with additional complications unique to proof-of-stake networks.
The Commission’s approach to Ethereum ETFs has been notably more cautious than its Bitcoin counterpart. While the SEC engaged in extensive dialogue with Bitcoin ETF applicants before the January approvals, the lack of similar engagement on Ethereum applications has been interpreted as a negative signal.
Compliance teams across the industry are watching closely. An Ethereum ETF denial would not only affect the applicants but could set precedent for how the SEC treats all proof-of-stake-based digital assets in regulated financial products. The implications extend to Layer 2 tokens, DeFi governance tokens, and any asset that relies on staking mechanisms.
What’s Next
The SEC faces a decision deadline on the VanEck Ethereum ETF application on May 23, 2024, with the ARK 21Shares decision expected shortly after on May 24. These dates represent the first real test of whether the SEC will extend its Bitcoin ETF reasoning to Ethereum or draw a harder line.
Market participants are pricing in a rejection. Ethereum trades at $2,911 as of May 11, down 6.6% over the past week, reflecting broader market weakness and diminished ETF approval expectations. Bitcoin, by contrast, has held relatively firmer at $60,793, buoyed by its established ETF infrastructure.
If the SEC does reject the applications, the industry will likely pursue legal challenges — following the playbook that ultimately forced Bitcoin ETF approvals after Grayscale’s court victory in 2023. The timeline for such a challenge could push Ethereum ETF availability into late 2025 or beyond, fundamentally altering the competitive landscape between the two largest cryptocurrencies in terms of institutional accessibility.
Disclaimer
This article is for informational purposes only and does not constitute financial advice. Cryptocurrency investments carry significant risk. Always conduct your own research before making investment decisions.
removing staking just to get approved feels like launching a car without an engine. the whole point of eth is the yield
chainwatcher_ exactly. an eth etf without staking is basically just price exposure with extra steps. the yield is what makes eth different from btc
removing staking from the filing right before the deadline was basically ARK admitting SEC engagement was zero. balchunas called it
Anneli K. stripping staking right before the deadline was ARK waving a white flag. balchunas saw it from a mile away
Anneli K. Balchunas basically said the SEC wasnt even returning calls on staking. removing it was ARK reading the room not negotiating. smart but painful
Balchunas was right. this wasnt the SEC giving feedback, this was issuers guessing what might work. totally different dynamic
no staking means no yield means institutions get a worse product than just buying spot. gensler won the battle and lost the war
eth_yield_ the 3-4% staking yield on an ETF would have been the killer feature vs IBIT. without it ETH ETFs are just a worse wrapped asset
stake_cap_ nailed it. 3-4% staking yield on an ETF would have differentiated it from IBIT. now its just a worse wrapper
stake_cap_ the 3 to 4 percent staking yield would have been the one differentiator vs IBIT. without it ETH ETFs are just beta exposure to BTC with extra regulatory baggage
removing staking from the ETF was the only path to approval and everyone knew it. the SEC would never approve a yield bearing security
staking_capitulation_ the irony is staking yield is 3-4%. institutional buyers dont care about that. removing it cost them nothing
howey test hangs over everything. theyll probably approve a neutered version first then slowly add features back
Eric Balchunas hinting that the amendment was one sided was telling. the SEC wasnt negotiating they were dictating terms
so we get an eth etf that cant stake. brilliant. might as well just buy the token directly and stake yourself
Tomasz K. removing staking to appease the SEC was the right call. the Howey Test risk from staking yields was real and getting the ETF approved mattered more than a few percent in staking rewards
Balchunas saying there was zero productive SEC engagement tells you everything about the approval process. issuers were just guessing what the regulator wanted
Brigitte H. issuers guessing is the whole ETF game though. blackrock had the same dynamic with the btc etf, they just had better lawyers
padawan_ issuers guessing is right. blackrock had better lawyers so they got approved first. ARK just kept stripping features until something stuck
BlackRock had better lawyers so they got approved first. ARK and 21Shares removal of staking shows the Howey Test pressure
brigitte the zero productive SEC engagement detail is the worst part. ARK was literally guessing what gensler wanted and kept stripping features until he stopped objecting. thats regulation by exhaustion
zero productive SEC engagement on this proposal tells you everything about the current stance
an ETH ETF without staking is like buying a car and being told the engine comes later
no staking means no yield capture for the fund. investors get price exposure and pay a management fee for the privilege. just buy ETH and stake it yourself
no staking means no yield capture. people will just buy ETH and stake themselves instead of holding the ETF
hiroshi is spot on. without staking the ETH ETF is just price exposure with a management fee. direct staking on lido or rocketpool gets you 3-4% yield and actual network participation