The Hong Kong Securities and Futures Commission (SFC) is reportedly considering the addition of an Ether (ETH) staking option for issuers of spot ETH exchange-traded funds (ETFs). Bloomberg reports that the financial regulator is currently evaluating whether ETH ETF issuers should be allowed to stake Ether in order to generate passive income. Earlier this year, Hong Kong approved a Bitcoin ETF, following the United States’ approval of 10 spot ETFs more than three months prior.
The SFC is focused on whether to permit staking of Ether through licensed platforms. This topic has been recently discussed with the country’s crypto ETF issuers following several proposals. The regulator is still in the discussion phase and has not yet set a definitive timeline for a decision or implementation.
Unlike Bitcoin, Ethereum operates on a proof-of-stake consensus protocol, which allows users to stake their assets on the network. This contributes to network security and provides a return, currently around 3%.
If approved, staking the Ether held in Hong Kong spot Ethereum ETFs could offer investors passive income in addition to potential capital gains. This could potentially support the city’s ambitions to become a global crypto hub. However, it remains uncertain whether allowing staking will significantly boost the currently low demand for ETFs in the region.
The proposal to introduce staking comes at a time when the demand for ETFs in Hong Kong has been weak. The city launched Asia’s first spot Bitcoin and Ethereum ETFs on April 30, managed by entities such as China Asset Management (ChinaAMC), Harvest Global, and Bosera/HashKey. However, these new ETFs have seen minimal capital inflows compared to their U.S. counterparts, which experienced $154 million in inflows into Bitcoin ETFs in a single day.
This initiative by the SFC contrasts with the stance of the U.S. Securities and Exchange Commission (SEC), which considers staking services as an investment contract and therefore a potential violation of securities laws. The SEC’s strict position has led major financial institutions in the U.S. to exclude staking from their spot ETH ETF offerings, as seen in Fidelity’s removal of staking options in its latest regulatory filings. The SEC has actively pursued legal actions against major crypto firms for their staking products, alleging violations of federal securities laws.
Due to this regulatory uncertainty, several Ethereum ETF applicants, including Fidelity, BlackRock, Grayscale, Bitwise, VanEck, Franklin Templeton, Invesco Galaxy, and ARK 21Shares, have excluded staking from their fund plans. Some market participants argue that these funds may be less attractive to investors without staking.
The SEC is expected to announce its decision on the pending Ethereum ETF applications today, May 23. Market sentiment has turned positive this week, with Bloomberg analyst Eric Balchunas raising the odds of approval to 75% due to increasing political pressure on the financial regulator. Additionally, the chances of approval on Polymarket have increased to 65%. Meanwhile, Coinbase is challenging the SEC’s stance on staking by asserting that core staking is not a security because it does not involve an investment of money, and the opportunity cost of staking is not an investment.
In 2024, Hong Kong became a growing hub for crypto service providers due to several pro-crypto regulations. It became the first country to approve a spot ETH ETF ahead of the United States. However, the response since its launch last month has been lukewarm. Allowing staking could potentially attract a new stream of investment into the country’s ETFs, enhancing their appeal and supporting Hong Kong’s goal of becoming a global crypto hub.
