SEC Raises Concerns Over REX-Osprey Staked ETH ETF Compliance

The U.S. Securities and Exchange Commission (SEC) has raised significant concerns about the qualification of a proposed staked Ether (ETH) Exchange Traded Fund (ETF) from REX Shares and Osprey Funds under federal securities laws. The SEC staff has highlighted unresolved questions regarding the fund’s ability to meet the definition of an “investment company” under the Investment Company Act of 1940. This act provides a framework for regulating pooled investment vehicles, and the SEC is scrutinizing whether the REX-OspreyETH ETF, as currently designed, would legally qualify under this framework.

The SEC has also expressed concerns that the registration statement for the REX-OspreyETH ETF might have been improperly filed on Form N-1A, which is typically used by open-end investment companies such as mutual funds and most ETFs. If the fund does not fit the traditional mold, a different form or approach might be required. Additionally, the SEC is concerned that the disclosures about the fund’s status as an investment company could be potentially misleading to investors. If these issues are not resolved, the SEC staff will consider further actions to ensure compliance, potentially impacting the launch of such staked ETH products.

The introduction of staking into an ETF structure is a key area of the SEC’s examination. Staking involves locking up cryptocurrencies to support a blockchain network’s operations in return for rewards. The SEC is looking into how this activity fits with existing ETF regulations. Key aspects under review include the nature of the assets held by the ETF, liquidity and redemption mechanisms, and the disclosure of risks associated with staking. The SEC has previously indicated that some cryptocurrencies might be considered commodities rather than securities, which could question the ETF’s eligibility to register as an investment company under the 1940 Act. Traditional ETFs are known for specific liquidity, redemption, and pricing mechanisms, and the SEC is examining whether the staking and unstaking processes align with these established standards. The agency is also focused on whether the fund adequately explains the mechanics of staking, the associated risks, and how staking rewards will be generated, accounted for, and distributed to investors.

The SEC’s cautious approach to these new staked crypto products is not entirely unexpected, given the agency’s broader stance on digital assets and investor protection. The questions raised about the REX-OspreyETH ETF highlight the regulatory hurdles that innovative crypto investment vehicles face in the U.S. market. The resolution of the SEC’s concerns regarding the REX Osprey staked ETH ETF carries significant potential outcomes. Failure to adequately address these issues could lead to delayed approval or even outright rejection of the proposed ETF. This situation also highlights the pressing need for greater regulatory clarity for crypto-based financial products, especially those involving newer mechanisms like staking. Central to the SEC’s review is its mandate to protect investors, meaning any product must demonstrate sound structure, transparency, and full risk disclosure. Ultimately, how these specific concerns are handled will likely set an important precedent for future filings of similar staked crypto ETFs in the U.S. market.