Ark and 21Shares Modify Spot Ethereum ETFs with Cash Creation/Redemption Policy

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

According to one section, financial firms permitted to purchase and redeem ETF shares have access only to cash generation and redemption. They do not have access to in-kind creation and redemption involving ETH.

The relevant sections are:

“Approved participants will deliver only cash to issue shares and will receive only cash when redeeming shares. Additionally, Authorized Participants will not directly or indirectly purchase, hold, deliver or receive Ethereum as part of the creation or redemption process, nor will they instruct the Trust or any Ethereum counterparty (in connection therewith).”

Cash generation and redemptions were at the heart of the recent approval of a spot Bitcoin ETF, and the same is expected for a spot Ethereum ETF. It is unclear why the U.S. Securities and Exchange Commission (SEC) ultimately insisted on a cash-based approach, but some reports point out that current U.S. regulations make it difficult for participants to handle cryptocurrencies.

ETH staking will also be promoted with the update.

The latest filing also suggests that the ETF issuer plans to participate in Ethereum staking. The filing states that sponsor 21Shares US LLC “generally expects to hold ether tokens in the Trust’s Cold Vault Balance.”

The document further states that while staking can generate rewards that are treated as profits, staking also carries the risk of loss.

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

Amendments Could Be Good News for ETH ETF

The amendments from Ark and 21Shares are a relatively positive development for the spot Ethereum ETF. The SEC recently extended the deadline for several other ETH ETFs, including BlackRock, Fidelity, Grayscale, and Invesco Galaxy. In contrast, today’s amendments suggest some progress.

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

Expectations surrounding the approval of a spot Ethereum ETF are mixed. One Polymarket prediction market reported a 43% chance of approval in May. Seyffart believes there is a 60% chance of approval, while one JP Morgan member believes there is a 50% chance of approval. Standard Chartered Bank is expecting approval in May, but TD Cowen is not expecting approval until 2024.

Ethereum (ETH) is slightly higher than the 24-hour market average, although it is unclear whether the latest news has had an impact on investor sentiment. ETH rose 1.9%, the cryptocurrency market rose 1.5%, and Bitcoin (BTC) rose 1.3%.