Key Takeaways

• The SEC has delayed approval of an Ethereum ETF with staking rewards, proposed by REX Shares and Osprey Funds.

• At issue is whether these funds qualify as legitimate investment companies and whether their structures comply with Rule 6c-11.

• The use of offshore entities and income from staking complicates their regulatory status.

• Approval of an Ethereum staking ETF could create new pathways for institutional adoption of such assets.

• The SEC’s decision on this case will likely set the tone for future staking-related ETF products.

Ethereum ETF Paused, No Staking Rewards Yet

The U.S. Securities and Exchange Commission (SEC) has pressed pause on proposals from REX Shares and Osprey Funds, citing concerns about legal structure, compliance, and investor protection.

Source: etf.com

While the concept of an Ethereum ETF tied to staking is exciting for many investors, the SEC’s reaction signals ongoing friction between crypto innovation and traditional financial regulation.

What’s The Problem With The Ethereum ETF Proposal?

At the core of the SEC’s hesitation is whether these ETFs actually qualify as “investment companies” under U.S. securities law. The Investment Company Act of 1940 requires that any fund operating under the ETF label must primarily invest in securities.

The SEC argues that the proposed Ethereum ETF products might not meet this definition, especially if their income is largely derived from staking rewards rather than traditional securities like stocks or bonds.

Regulatory Red Flags

• The language in the Ethereum ETF filings may mislead investors by implying that the funds operate like traditional investment companies.
• If the funds aren’t technically “investment companies,” they shouldn’t benefit from regulatory exemptions meant for those that are.
• The SEC may view these filings as circumventing standard registration rules.

Cayman Islands & Corporate Complexity

One of the major red flags for regulators is how these Ethereum ETF structures are designed. Instead of a straightforward U.S.-based entity, the funds include:

• C-Corporations.

• Offshore subsidiaries located in the Cayman Islands.

This type of structure isn’t new in the financial world but raises compliance issues. The SEC is particularly concerned that these setups may violate Rule 6c-11, which dictates how ETFs can be registered, disclosed, and traded in U.S. markets.

Why Is Staking A Problem For An Ethereum ETF?

The unique feature of these proposed Ethereum ETFs is their promise of staking rewards. On Ethereum’s PoS (Proof-of-Stake) network, users can lock up their ETH to help validate transactions and, in return, earn additional ETH.

The SEC Is Concerned That Crypto ETFs Don’t Meet The Necessary Guidelines

Source: X (@etfcom)

While staking is a core feature of the Ethereum blockchain, it’s murky from a regulatory standpoint:

• The SEC has not banned staking, but it has warned about the lack of investor protection.
• It’s unclear whether staking income counts as a security, yield-bearing product, or something else.
• Regulators worry that retail investors might misunderstand the risks associated with staking via an ETF.

What’s The Status Of The Ethereum ETF Launch?

Although the Ethereum ETF filings technically became “effective” as of May 30th, that does not mean they’re approved for trading.

Neither REX Shares nor Osprey Funds has listed the ETFs on any exchange, and both companies have stated they won’t proceed without full regulatory clearance.

Furthermore, the SEC has indicated that it may take additional steps if concerns around legal structure and investor risk are not resolved.

FAQ

What is an Ethereum ETF?

An Ethereum ETF is an exchange-traded fund that provides investors exposure to the price of Ethereum (ETH), without requiring them to directly hold or manage crypto assets.

Why is the SEC delaying the Ethereum ETF approval?

The SEC is concerned that the ETF may not meet legal requirements under the Investment Company Act of 1940. It also questions the fund’s complex structure and use of staking rewards.

Is staking legal in the U.S.?

It’s more accurate to say that staking is not illegal. However, the regulatory treatment of staking, especially in investment products, is still undefined, leading to cautious oversight.

What is Rule 6c-11?

Rule 6c-11 provides a framework for how ETFs can be registered and traded in the U.S. Funds must meet transparency, liquidity, and structural standards to qualify.

Will Ethereum ETFs ever include staking rewards?

It’s possible, but any such product will need to meet rigorous regulatory standards.