Ark and 21Shares amend spot Ethereum ETF with cash creation/redemption policy

Ark Invest and 21Shares amended their joint application for a spot Ethereum exchange-traded fund (ETF) in a Feb. 7 S-1 filing.

According to one section, financial firms that are allowed to purchase and redeem ETF shares will only have access to cash creations and redemptions. They will not have access to in-kind creations and redemptions involving ETH.

The relevant section reads:

“Authorized Participants will deliver only cash to create shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or an Ether Counterparty [in that respect].”

Cash creations and redemptions were key to recent approvals of spot Bitcoin ETFs, and as such, the same should be expected for spot Ethereum ETFs. Though it is unclear why the U.S. Securities and Exchange Commission (SEC) ultimately insisted on cash-based methods, some reports suggest that it is difficult for participants to handle crypto under current U.S. regulations.

Update also puts forward ETH staking

The latest filing also suggests that the ETF issuers intend to engage in Ethereum staking. The filing states that 21Shares US LLC, the sponsor, “generally expects to stake ether tokens from the Trust’s Cold Vault Balance.”

The filing additionally notes that although staking may generate rewards, which are to be treated as income, staking also comes with a risk of loss.

Staking is not guaranteed in the final proposal. Scott Johnsson, GP at Van Buren Capital, noted that this section is bracketed and uncertain. Bloomberg ETF analyst James Seyffart believes that the SEC will ultimately not allow staking.

Amendment may be good news for ETH ETFs

Ark and 21Shares’ amendment is a relatively positive development for spot Ethereum ETFs. The SEC recently extended deadlines for several other ETH ETFs, including those from BlackRock, Fidelity, Grayscale, and Invesco Galaxy. By contrast, today’s amendment suggests some degree of progress.

However, none of those developments change the fact that the SEC must decide on a spot Ethereum ETF by May 23. The agency must approve or reject VanEck’s proposal on that date and will likely decide on other similar funds simultaneously.

Expectations around the approval of a spot Ethereum ETF are mixed. One Polymarket prediction market reports 43% odds of a May approval. Seyffart believes there is a 60% chance of approval, while one JP Morgan member believes there is a 50% chance. Standard Chartered Bank expects an approval in May, while TD Cowen does not expect an approval in 2024.

While it is unclear whether the latest news has affected investor sentiment, Ethereum (ETH) has gained slightly more than the 24-hour market average. ETH is up 1.9%, the crypto market is up 1.5% and Bitcoin (BTC) is up 1.3%.

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