Fidelity has recently made updates to its S-1 application with the United States Securities and Exchange Commission (SEC) in order to seek approval for its spot Ether exchange-traded fund (ETF). This move reflects the changing attitudes and nuances within the industry and regulatory landscape.
The revised application emphasizes that the underlying Ether tokens in the ETF will not be staked, which aligns with the SEC’s requirements for publicly traded securities products.
There has been a notable shift in regulatory attitudes towards spot Ether ETFs in the United States. Previously, it seemed likely that the SEC would reject such applications, as indicated by regulatory filings, public statements from SEC Chair Gary Gensler, and ongoing investigations. However, recent developments suggest a potential change in this stance. Analysts James Seyffart and Eric Balchunas from Bloomberg have adjusted their forecasts for the approval probabilities of a spot Ether ETF from 25% to a more optimistic 75%.
This shift is attributed to the ETF becoming a contentious political issue, a sentiment echoed by multiple industry sources. Seyffart has expressed concern over the political implications of the SEC’s evolving approach, hinting at significant discussions and a potential influx of filings in the near future. He acknowledges the high stakes involved, particularly due to the vigilant Ether community closely monitoring these developments.
The SEC’s decision-making process is currently in the spotlight, with a pending deadline for VanEck’s spot Ether ETF set for May 23. This application is one of the first in a series under consideration, with other major financial entities such as ARK 21Shares, Hashdex, Invesco Galaxy, BlackRock, and Fidelity also eagerly awaiting outcomes. The SEC has taken its time in reviewing VanEck’s application, indicating a thorough examination process.
Meanwhile, the classification of staked Ether remains a contentious topic. The SEC has previously suggested that cryptocurrencies that allow staking could be considered securities under the Howey test. This viewpoint was supported by Gensler’s statements during a 2022 Senate Banking Committee hearing, as reported by The Wall Street Journal. The transition of Ethereum to a proof-of-stake (PoS) model adds complexity to this debate and may influence the SEC’s regulatory approach.
Despite a potential softening on the approval of Ether ETFs, the distinction between Ether and staked Ether remains significant. Alex Thorn, head of research at Galaxy Research, speculates that the SEC may differentiate between non-staked ETH and staked ETH or “staking as a service” models, treating the latter as securities. This nuanced view suggests that the SEC is trying to navigate the intricate regulatory and technical landscapes.
Fidelity’s initial ETF filing in March proposed staking a portion of the ETH holdings, while acknowledging the risks associated with staking, such as potential fund losses through slashing penalties and liquidity issues. It also recognized the tax implications of staking rewards, which would be considered income for the fund and lead to taxable events for investors without direct distributions.
The evolving regulatory framework and Fidelity’s strategic adjustments in its ETF proposal highlight the delicate balance between innovation, investor protection, and regulatory compliance in the rapidly growing cryptocurrency sector. As the deadline approaches, the industry eagerly awaits the SEC’s decisions, which could establish significant precedents for the future of cryptocurrency investments and the broader financial landscape.
