ARK 21Shares adds cash-creation and Ether staking to Ethereum ETF filing
While cash redemption can improve an ETF's tracking ability, it tends to increase costs that may be passed to investors.
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ARK 21Shares has amended its spot Ethereum exchange-traded fund (ETF) application with changes that switch and adopt a cash-creation model alongside new provisions for Ether staking.
Bloomberg ETF analyst Eric Balchunas shared portions of the filing on X, commenting that the filing also contained “other things” that align the Ethereum ETF application with the recently approved spot Bitcoin ETF’s prospectus.
HERE WE GO AGAIN: ARK/21Shares has just filed an amended S-1 for their spot Ether ETF, looks like they updated to be only cash creations and some other things that bring it in line w the recently approved spot btc etf prospectus.. pic.twitter.com/clN2oZmA6I
— Eric Balchunas (@EricBalchunas) February 7, 2024
Exchange-traded funds utilize a creation and redemption process between sponsors and authorized participants that helps align market pricing with net asset value. Recently approved spot Bitcoin ETFs feature cash redemption models stipulated by the SEC. This requires authorized participants to exchange cash instead of in-kind assets for ETF shares.
While cash redemption can improve an ETF’s tracking ability, it tends to increase costs that may be passed to investors. On the other hand, the model provides more control over assets, drastically simplifying accounting and auditing procedures for the funds. Despite potential expense drawbacks, the SEC appears to favor the cash model for providing a tighter correlation between ETF shares and underlying holdings.
ARK 21Shares has acknowledged that this model may adversely impact arbitrage transactions intended to link the ETF’s share price with Ether closely. ARK 21Shares said it expects to stake Ether from the trust’s cold storage balances and that the trust would receive staking rewards treated as income.
“The Sponsor may, from time to time, stake a portion of the Trust’s assets through one or more trusted [third-party] staking providers,” the filing states.
Despite the prospects of staking rewards, the firm acknowledges that Ether staking comes with associated risks, such as slashing penalties, which could result in the loss of staked Ether. Notably, the filing also highlights how staked Ether may be locked for extended periods.
The SEC is slated to decide on multiple spot Ether ETF applications in the coming months, including VanEck by May 23, ARK 21Shares by May 24, Hashdex by May 30, Grayscale by June 18, and Invesco by July 5. Additional applications from Fidelity and BlackRock are scheduled for August and August 7, respectively.
Bloomberg ETF analyst James Seyffart expects a general decision from the SEC covering all applications by May 23. However, the analyst has lowered the odds of a spot Ether ETF approval within the year from 70% to 60%.