Fidelity files S-1 application with US SEC for spot ETH EFT with staking


Fidelity filed an S-1 application with the United States Securities and Exchange Commission (SEC) on March 27 to create a spot Ether (ETH) exchange-traded fund (ETF). As expected from an earlier filing, the ETF will give Fidelity the option to stake part of the ETH it holds. 

The asset management giant’s ETF would trade on the Cboe BZX Exchange. Fidelity Digital Asset Services, which affiliated with sponsor FD Funds Management, would serve as custodian of the trust’s ETH. According to the S-1:

The Trust [fund] intends to establish a program to stake a portion of the Trust’s assets through one or more staking infrastructure providers.

That decision entails additional risk, the application noted. There would be a risk of loss “including in the form of ‘slashing’ penalties” and liquidity risks while the stake is being processed. In addition, staking rewards would be treated as income for the fund for tax purposes, as a result of which investors will experience a taxable event “without an associated distribution from the Trust.”

The application does not specify the expected fees for the ETF. In case of a fork, the custodian will decide which chain the fund will support.

Fidelity’s spot ETH EFT S-1 application. Source: SEC

There are multiple other risks associated with the ETF. The form points out that regulatory measures in the United States and elsewhere could negatively impact the fund. Among the potential causes of the termination of the trust, it lists regulatory action such as the SEC determining the fund to be an investment company under the 1940 Act, the U.S. Commodity Futures Trading Commission determining the fund to be a commodity pool under the Commodity Exchange Act and the determination that the fund is a money service business under the rules of the U.S. Treasury Department’s Financial Crimes Enforcement Network.

The SEC is reportedly investigating the Ethereum Foundation, which analysts say could impact the chances of spot ETH ETF approval. There has also been political opposition to spot ETH EFTs.

Related: SEC radio silence on Ethereum ETF ‘not a good sign’ — Bloomberg analyst

The Ethereum blockchain is also liable to a 51% attack, where a bad actor could take over the governance of the network through a majority vote. “The top three largest staking pools controlled nearly 50% of the ether staked on the Ethereum network,” according to the form. Lido DAO is the largest ETH staking pool, with 31.5% of all staked ETH.

Source: David Gokhstein

Analysts have said that the introduction of a spot ETH ETF could reduce the influence of DAOs, but create new “concentration risk” depending on how ETFs choose to distribute their ETH among stakers.

The SEC has pushed back the approval deadline for other ETH ETFs to May 23. There are eight applicants for spot ETH EFTs awaiting an SEC decision.

Magazine: Ether ETFs face Senate opposition, Wright is not Satoshi, and Dencun goes live: Hodler’s Digest, March 10-16