Fidelity 'will not participate' in proof-of-stake, amends staking language in Ethereum ETF filing

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Fidelity has filed an amended S-1 registration statement with the SEC for its prospective Ethereum (ETH) exchange-traded fund (ETF) ahead of upcoming deadlines for such funds.

Notably, the amended statement removed all language about the fund’s participation in proof-of-stake validation for the Ethereum network, including staking rewards, which were mentioned in the previous prospectus.

“The Trust will not stake the ether custodied at the Custodian. The Trust will not invest in derivatives. The Sponsor believes that the Shares are designed to provide investors with a cost-effective and convenient way to invest in ether without purchasing, holding and trading ether directly,” the amended filing states on its prospectus overview.

This change may be attributed to the SEC’s concerns about staking crypto. In June 2023, the SEC sued Coinbase for providing access to staking through its platform, claiming it was violating securities laws. The amended filing follows reports that the SEC has asked ETF issuers to update their 19b-4 filings, which are required for launching publicly traded securities products in the U.S.

“The Trust will not participate in the proof-of-stake validation mechanism of the Ethereum network (i.e., the Trust will not “stake” its ether) to earn additional ether or seek other means of generating income from its ether holdings,” the document stated.

The next deadline for the SEC is for VanEck’s Ether ETF proposal on May 23. Senior Bloomberg ETF analyst Eric Balchunas has increased the odds of approval for the 19b-4 forms to 75% from just 25%. However, Ether ETF issuers will also need to get their S-1 filings approved, which could take weeks to months, according to Bloomberg ETF analyst James Seyffart.

Despite the potential approval of Ether ETFs, the SEC may still classify staked Ether as a security. During a 2022 Senate Banking Committee meeting, SEC Chair Gary Gensler reportedly said that crypto and intermediaries that allow holders to “stake” their crypto may define them as a security under the Howey test.

Alex Thorn, head of research at Galaxy Research, suggests that the SEC may attempt to differentiate between ETH not being a security and staked ETH being a security. Fidelity’s initial S-1 application, filed on March 27, stated that the fund aimed to stake a portion of its ETH supply and noted the additional risks associated with staking, such as potential loss of funds through slashing penalties and liquidity risks.

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