(Bloomberg) — Many in the crypto market believe a key change has been made in some applications to propose Spot Ether Exchange Traded Funds it will be good for the Ethereum blockchain, putting the future ETF products themselves at a disadvantage.
Issuers including Fidelity Investments and Ark Investment Management have scrapped plans to “put shares” of Ether they would buy for the proposed funds if they are approved. Staking is industry jargon for the mechanism that drives Ethereum and so-called proof-of-stake blocks. It involves locking cryptocurrency deposits to help validate transactions and secure the network in exchange for rewards paid for doing that work.
The stake has been a major issue for Ether as it allows holders to collect a yield, raising questions about whether the token should be treated as a security that falls under the purview of US regulators. Some market participants believe that if ETFs do not stake their tokens, the funds will be less attractive to investors than buying Ether directly on the crypto market, where they are free to stake the tokens.
Read more: Why the Crypto Market Is Betting on Spot-Ether ETFs: The QuickTake
“There will be an immediate opportunity cost to holding Ether via a US ETF from the foregone rewards,” said Brian Rudick, senior strategist at digital asset firm GSR.
Ether prices have risen about 20% over the past three days amid growing optimism that the SEC will approve at least one ETF by the regulator's Thursday deadline for a decision on VanEck's application.
The scrapping of plans for stock ETFs did not come as a surprise to many observers, as the regulator considers Ethereum's core mechanism similar to crypto lending. Crypto exchange Kraken agreed to pay $30 million to settle SEC allegations that it broke the agency's rules by offering “invasion-as-a-service” products.
“At the moment, the stock is seen as more of a safety as staked Ether offers yield,” said Ayesha Kiani, chief operating officer of crypto hedge fund MNNC Group. “This is the best example of the intersection of decentralization and SEC standards.” Owning Ether without staking the tokens means the holder isn't helping secure the blockchain, she added, “which is a problem because it would have given someone like Fidelity or VanEck a chance to contribute to the Ethereum network.” .
At the same time, many industry advocates believe that the removal of share plans among ETF issuers is actually a net positive for the industry, where the goal is a financial system that is decentralized and not dependent on a small number of intermediaries.
“Staked Ether being part of ETFs could have been a huge centralizing force,” said Leo Mizuhara, founder of decentralized finance institutional asset manager Hashnote. “For example, the amount of Bitcoin now in custody at Coinbase is huge because of the ETF phenomenon. A similar thing could have happened with the establishment of ETH.”
Furthermore, he added, “the centralizing forces in protocols like Ethereum are also potentially destabilizing forces for the protocol if things go wrong. Because of this, I think it's beneficial and stabilizing not to own stocks in ETFs.”
The fact that ETF issuers won't stake Ether likely aligns with Ethereum's goals and will help protect the second-largest cryptocurrency from a “long-term institutional takeover,” GSR's Rudick said.
Some are concerned that if Ether ETFs are adopted and become a huge success like Bitcoin ETFs, which have so far attracted around $13 billion in net inflows, it will result in issuers amassing an alarming amount of Ether. Without putting Ether at risk, it can make the Ethereum network more vulnerable to attack. Currently, about 27% of all outstanding Ether is staked, according to the blockchain data firm Nansen.
“Only 27% of all Ether is at stake, so we can all live happily ever after, apparently,” said MNNC's Kiani.
However, some expect ETF issuers to eventually get regulatory clarity to put Ether at risk.
“I don't expect this to last forever,” he said Ryan Watkins, co-founder of Syncracy Capital. “With clearer regulation in the coming years, these ETFs will eventually feature stocks. The incentives are just too high.”