SEC Requests Franklin Templeton Remove Staking from Ethereum ETF Application

The U.S. Securities and Exchange Commission (SEC) has recently requested that Franklin Templeton remove the staking component from their proposed Spot Ethereum ETF application. This move is not an outright rejection of the ETF but a specific instruction regarding a feature that many applicants included to make their products more appealing to investors. It signals the SEC’s continued scrutiny over aspects of cryptocurrency that blur the lines between commodities and securities, particularly crypto staking.

Crypto staking on proof-of-stake networks like Ethereum involves locking up cryptocurrency to support the network’s operations, such as validating transactions and securing the blockchain. In return for staking their Ether (ETH), participants can earn rewards, similar to earning interest in a traditional bank account or dividends from stocks. For an Ethereum ETF, the idea was to potentially stake a portion of the underlying ETH held by the fund. This could offer investors a yield on their investment on top of any potential price appreciation of ETH. This yield component was seen as a significant advantage, potentially making the ETF more attractive compared to simply holding ETH directly or through other non-staking investment vehicles.

The SEC’s stance on crypto staking has been a subject of debate. One major concern revolves around whether staking services constitute an investment contract, which could classify the staked asset (or the staking service itself) as a security under U.S. law. This has significant regulatory implications. Other concerns might include custody complexity, slashing risk, and the overall lack of clear regulatory guidelines specifically for staking services offered to large investment vehicles.

While this specific report is about Franklin Templeton’s application, it likely has implications for other applicants as well. Major players like BlackRock, Fidelity, Grayscale, and others also have pending applications for a Spot Ethereum ETF, and many had initially included staking features. This request from the SEC suggests a potential standardized approach: the regulator may require all approved Spot Ethereum ETF products to exclude staking initially. This would simplify the regulatory approval process by removing a contentious element and aligning these ETFs more closely with the structure of approved spot Bitcoin ETFs, which do not involve staking.

If staking is universally excluded, it could impact the potential returns for investors compared to holding and staking ETH directly. However, it might also pave a clearer path for the ETFs to receive approval, potentially opening the door for broader institutional and retail access to Ethereum exposure through a regulated investment product. This table highlights that while a non-staked ETF might lack the yield component, it could be the necessary compromise to gain regulatory approval and offer a familiar, regulated investment wrapper for gaining exposure to ETH.

For investors eagerly awaiting a U.S. Spot Ethereum ETF, this news, while potentially disappointing regarding staking yield, doesn’t necessarily mean the end of the road for approval. It could simply be a step in the negotiation process with the SEC to get the structure right. Patience is key as the regulatory process is often slow and involves back-and-forth between issuers and the SEC. Delays and requested amendments are common. The market’s attention may now pivot more towards the likelihood of any Spot Ethereum ETF approval, even without staking, by the key deadlines in May. If an ETF is approved, understand whether it includes staking or not, as this will impact potential returns. Consider the trade-offs between holding ETH directly (which allows for staking if you choose) and investing in a potentially non-staked ETF (which offers regulatory structure and ease of access via traditional brokerage accounts). Monitor regulatory signals by keeping a close eye on further communications or filings from the SEC and the ETF applicants like Franklin Templeton.

While the exclusion of staking might slightly diminish the yield potential compared to direct staking, the primary appeal of a Spot Ethereum ETF for many investors is regulated access to ETH price movements within a familiar investment structure. The news that the SEC has reportedly asked Franklin Templeton to remove staking from their Spot Ethereum ETF application is a significant signal regarding the regulatory path forward. It underscores the SEC’s cautious approach, particularly concerning aspects like crypto staking that have unclear regulatory classification. This development, while a delay for a desired feature, might ultimately help streamline the approval process for a basic Spot Ethereum ETF product by removing a potential hurdle. Investors should stay informed and be prepared for the possibility that initial U.S. Ethereum ETFs may focus solely on providing exposure to the price of ETH, without the added layer of staking yield. The journey towards regulated crypto investment products is complex, but each step, including these detailed requests from the SEC to applicants like Franklin Templeton, brings more clarity, even if it comes with temporary setbacks for specific features like crypto staking.