Ark and 21Shares are adapting the spot Ethereum ETF with a cash creation/redemption policy

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

According to one section, financial companies that are allowed to buy and redeem ETF shares will only have access to cash creations and redemptions. They do not have access to in-kind creations and redemptions involving ETH.

The relevant section reads:

“Authorized participants will only provide cash to create shares and will only receive cash upon redemption of shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver or receive Ether as part of the creation or redemption process, or otherwise direct the Trust or any Ether Counterparty. [in that respect].”

Cash creation and redemption was critical to the recent adoption of spot Bitcoin ETFs, and as such the same should be expected for spot Ethereum ETFs. While it is unclear why the US Securities and Exchange Commission (SEC) ultimately pushed for cash-based methods, some reports suggest that it is difficult for participants to get into crypto under current US regulations.

Update also suggests ETH staking

The latest filing also suggests that the ETF issuers plan to participate in Ethereum staking. The filing states that 21Shares US LLC, the sponsor, “generally expects to stake ether tokens from the Trust’s Cold Vault balance.”

The filing further notes that while staking may provide rewards, which should be treated as income, staking also carries a risk of loss.

Deportation is not guaranteed in the final proposal. Scott Johnsson, general practitioner at Van Buren Capital, noted that this section is in parentheses and uncertain. Bloomberg ETF analyst James Seyffart believes the SEC will ultimately not allow staking.

Change could be good news for ETH ETFs

Ark and 21Shares’ amendment is a relatively positive development for spot Ethereum ETFs. The SEC recently extended the deadlines for several other ETH ETFs, including those from BlackRock, Fidelity, Grayscale, and Invesco Galaxy. Today’s amendment, on the other hand, suggests a degree of progress.

However, none of these developments change the fact that the SEC must make a decision on a spot Ethereum ETF by May 23. The agency must approve or reject VanEck’s proposal by 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 forecast market reports a 43% chance of an approval in May. Seyffart believes there is a 60% chance of approval, while a JP Morgan member believes there is a 50% chance. Standard Chartered Bank expects approval in May, while TD Cowen does not expect approval in 2024.

While it is unclear whether the latest news has affected investor sentiment, Ethereum (ETH) is up slightly more than the 24-hour market average. ETH is up 1.9%, the crypto market is up 1.5% and Bitcoin (BTC) is up 1.3%.