The recent batch of ETF issuers could only progress by committing not to stake any ETH they accumulate.

Yield is too risky

The SEC has finally opened the door for spot ether ETFs in US markets.

However, the regulator remains committed to "protecting investors" from risky crypto yields.

In reality, the recent ETF issuers could only advance by pledging not to stake any ETH they gather.

Ether is different from bitcoin. While both Bitcoin and Ethereum blockchains are censorship-resistant networks, giving them inherent value, bitcoin as a currency is similar to gold and silver in that it is not a productive asset. You buy it, hold it, and hope its value increases or at least retains more value than the currency used to buy it.

ETH, on the other hand, can be staked at the protocol level to the blockchain. Staking involves running and maintaining a validator node, requiring some technical knowledge and a dedicated machine. The Ethereum network currently offers around 3.4% APY to those who stake. These staking rewards, paid in ETH, fluctuate based on the number of validators and network activity.

Missing out on a few percent may not seem significant, but the lost returns can grow quickly as ether's price rises.

The chart's green line shows the value of 32 ETH — the stake of an Ethereum validator — over the past 18 months, reflecting the portfolio of someone who bought and held ETH without staking it, which is the approach US ETFs are taking.

The opportunity cost of not staking ETH compounds rapidly.

The purple line represents the value of an Ethereum node participating in staking. Initially, 32 ETH became 34.36 ETH, a difference of about $8,800 at current prices.

Thus, the holder spent about $42,000 to sit on 32 ETH, now worth almost $120,000 — a 185% gain.

The staker invested the same amount but now has $128,800 worth of ETH — a 206% gain. (Activating MEV-boost on the node would further increase annual yield).

Staking ETFs may eventually be approved. Meanwhile, long-term ETF investors might be deterred by the initial ether-backed funds.

ETH, as an asset, offers much more.

The approval notice mentioned that the ETFs were greenlit via “delegated authority,” meaning the Division of Trading and Markets had the power to approve the products without a commissioner-level vote. ETF analyst James Seyffart noted this is standard procedure for the SEC.

However, it's also an interesting approach if the goal is to avoid revealing how political considerations influenced a crypto policy decision. The SEC is expected to be an impartial market regulator. Disclosing otherwise would undermine that perception.

Since the products were approved under delegated authority, any commissioner has 10 days to challenge and trigger a formal vote. Whether this happens is uncertain. It’s not impossible — two commissioners previously opposed spot bitcoin ETFs on strong grounds — but doing so would expose SEC leadership to considerable scrutiny. The agency isn't popular with Congress right now, given the bipartisan rejection of its crypto-related staff accounting bulletin.

As we say in such situations: Stay tuned.

—Michael McSweeney

The Works

Congress’ crypto markets regulation bill now heads to the Senate. As Casey Wagner reports, House members who supported the bill are optimistic about its prospects in the upper chamber.

Additionally, the House passed a measure blocking the Federal Reserve from issuing a retail CBDC.

Bloomberg reports that the FTX estate has concluded its discounted SOL sales.

Bloomberg also notes that half of the London Stock Exchange's ETF team has departed ahead of the market’s listing of crypto ETPs.

Kabosu, the shiba inu who inspired the doge meme and subsequently dogecoin, has passed away. Rest in peace.

The Morning Riff

Spot bitcoin funds were a big deal. Ether funds are significant too, but perhaps more impactful is ether’s classification as a commodity.

If ETH is a commodity, similar assets for other networks like Solana, Avalanche, and Algorand could also be considered commodities.

This is an exciting prospect, but spot ETFs for other cryptocurrencies may still face challenges in getting approved.

The CME listed bitcoin futures in 2017 and ether futures in 2021. These offerings, approved by the Commodities Futures Trading Commission, paved the way for the respective ETFs.

Crypto has long debated with regulators over what constitutes a crypto security.

The real question now is: What is a crypto commodity?