March 19, 2024 at 11:04 GMTModified date: March 19, 2024 at 11:04 GMT
March 19, 2024 at 11:04 GMT

Fidelity expands Ethereum ETF proposal with new staking feature

The SEC is given up to 90 days to respond to this new amendment, with the deadline for a decision set for 23 May.

Fidelity expands Ethereum ETF proposal with new staking feature

The financial services giant Fidelity, with an impressive $4.5 trillion in assets under management, has recently updated its Ethereum ($ETH) exchange-traded fund (ETF) proposal submitted to the US Securities and Exchange Commission (SEC).

This amendment is significant as it introduces a new dimension to the proposed ETF: the capability to engage in staking activities.

Unlike the original filing, this updated version outlines plans for the ETF to allocate a portion of its Ethereum holdings for staking purposes through a trusted and potentially affiliated provider.

Despite the update, Fidelity stopped short of naming any specific staking services, though the market includes notable entities like Lido DAO, RocketPool, and StakeWise.

The fundamental idea behind this move is to enable the ETF to earn staking rewards, or network rewards, in the form of Ether tokens. These rewards could potentially be treated as income for the fund, adding a new layer of value for investors.

The SEC’s response to this amended proposal is pending, with a 90-day review window now ticking down towards a 23 May deadline.

Market’s reaction

The crypto market responded quickly to Fidelity’s announcement, particularly affecting the tokens associated with prominent staking services. 

Despite initial spikes in the price of tokens like $LDO and $RPL following the news, these gains were not sustained, reflecting perhaps investor caution regarding the final approval of the ETF.

Fidelity is not the only player aiming for an Ethereum-based ETF; it is part of a competitive field that includes heavyweight contenders like BlackRock, ARK Invest, and several others. 

Each of these entities is eyeing the chance to lead in the burgeoning sector of crypto-based ETFs, particularly those that could involve staking yields. This feature has gained more attention since Ethereum’s shift to a Proof of Stake consensus mechanism.

Regulatory challenges 

As the crypto community watches these developments unfold, there is growing scepticism about the likelihood of the SEC giving the green light to these proposals.

This becomes pertinent given the regulator’s historical caution towards cryptocurrency products. Analysts like James Seyffart from Bloomberg have been vocal on social media about their doubts, particularly focusing on the SEC’s apparent hesitancy to fully embrace Ethereum ETFs that incorporate staking functionalities.

“Fidelity not giving up on Ethereum ETFs and not giving up on SEC allowing them to Stake within the ETF. Our base case is still that these aren’t gonna be approved”,  tweeted Seyffart recently. 

Bloomberg ETF analyst Eric Balchunas had initially estimated a 70% approval likelihood. However, recent developments, including the SEC’s continued silence and political pushback against SEC Chair Gary Gensler, have led to a more cautious outlook. Balchunas now assesses the probability at just 35%.

The regulatory landscape is further complicated by concerns from lawmakers. Senators Jack Reed and Laphonza Butler have expressed reservations about expanding crypto-based exchange-traded products (ETPs) to retail investors. 

On 11 March, they sent a letter to Gary Gensler advocating for a halt in the approval of new crypto-based ETPs. The senators argued that the recent SEC approvals for spot Bitcoin ETFs have inadvertently allowed Wall Street to market unstable cryptocurrency investments to the general public via brokerage and retirement accounts. 

They emphasised their concerns by stating: “We do not believe that other cryptocurrencies possess the necessary trading volumes or integrity to warrant associated ETPs… Retail investors would be exposed to significant risks from ETPs that involve thinly traded cryptocurrencies.”

Moreover, during a panel discussion on 13 February, industry experts from Bitwise Asset Management, Galaxy Asset Management, and Grayscale collectively assessed the likelihood of the SEC granting approval to the awaiting spot Ether ETF proposals. 

They concluded that there’s a 50% chance of these applications being green-lighted, a sentiment that aligns with earlier forecasts made by financial institutions such as JP Morgan and Bernstein Trading.