SEC Ethereum ETF Staking: A Closer Look

The US Securities and Exchange Commission (SEC) is considering proposals from exchanges like Cboe BZX and NYSE Arca to integrate staking services into existing spot Ethereum (ETH) exchange-traded funds (ETFs). Approval would significantly impact crypto adoption by providing traditional investors easier access to ETH and its staking rewards.

The Push for Staked Ethereum ETFs

Cboe BZX and NYSE Arca filed amendments for 21Shares and Grayscale’s ETF offerings, respectively, in February. Staking, a crucial part of Proof-of-Stake (PoS) blockchains, involves locking up cryptocurrency to validate transactions and earn rewards. Approval of these ETFs would allow traditional investors passive income generation while contributing to Ethereum's network security. This would also greatly benefit institutional crypto adoption.

Brian Fabian Crain, CEO of Chorus One, expresses cautious optimism about approval, highlighting the SEC's focus on robust investor protections.

“The approval of an Ethereum staking ETF would be a game-changer for institutional adoption. A staking-enabled ETF provides regulated, easy access to ETH with its yield, within a familiar ETF framework,” says Crain.

Can Staking Yield Revitalize Ethereum's Market Position?

Ethereum's price performance lagged behind Bitcoin's throughout 2024 and early 2025, reaching a two-year low. The potential for staking yield in ETFs could be a significant differentiator.

“Ethereum’s ~3% annual staking yield is a major draw, a clear advantage over Bitcoin. Even if ETH’s price growth trails Bitcoin’s, staked ETH offers potentially higher total returns,” explains Crain.

Increased ETH demand through ETFs would strengthen the network and its market position.

Hong Kong's Influence

Hong Kong's recent approval of staking services by licensed exchanges creates competitive pressure on the SEC. The SFC's framework prioritizes investor protection, requiring platforms to maintain full control of client assets and transparently disclose risks.

“Hong Kong’s adoption sends a message: compliant staking is possible. The SEC will take note,” Crain notes.

This international precedent could influence the SEC's decision, as US funds risk losing investors to international markets offering these products.

The “Investment Contract” Conundrum

A key SEC consideration is whether staking programs constitute investment contracts. The SEC's previous actions against centralized exchanges highlight this concern. However, the decentralized nature of Ethereum staking is argued to be distinct from centralized exchange models.

“An ETF staking its assets isn’t ‘selling’ a staking service; it’s directly participating in network consensus,” Crain clarifies.

Slashing Risks

Staking ETFs face the risk of slashing, where improperly acting validators lose staked ETH. This risk needs transparent disclosure and mitigation strategies. Custodian insurance policies might not cover slashing, so the SEC will scrutinize these safeguards.

Further SEC Considerations

Liquidity: Staked ETH's lack of instant liquidity presents a redemption challenge for ETFs.
Security: The SEC will heavily scrutinize how custodians secure private keys required for staking, likely demanding cutting-edge security measures. The point-and-click model aims to mitigate this risk.

When Will the SEC Approve Staking in Ethereum ETFs?

While challenges remain, the shift towards a more receptive regulatory climate increases the likelihood of approval. However, investor protection remains paramount.

“It now seems more likely than not that the SEC will approve a staking feature for Ethereum ETFs. A year or two ago, the SEC was firmly opposed. Now, the conversation has shifted to ‘how to do this safely’,” Crain concludes.

Approval by the end of 2025 remains a possibility, though the timeline remains uncertain. Codeum, a leader in blockchain security, offers smart contract audits, KYC verification, and custom smart contract development, assisting projects navigating this evolving regulatory landscape.