The exclusion of staking features from Ethereum ETFs is a response to regulatory pressures from the US Securities and Exchange Commission (SEC). Issuers amended their ETF filings to remove staking provisions before the approvals on May 23, aligning with the SEC’s regulatory expectations to facilitate the approval for their Ethereum ETFs.

Staking, which involves locking up crypto to validate transactions for rewards, is integral to Ethereum’s proof-of-stake (PoS) mechanism. However, the SEC views staking services as potentially constituting unregistered securities offerings. This perspective has led to enforcement actions against major crypto platforms like Coinbase and Kraken, alleging violations of federal securities laws. Consequently, ETF issuers opted to eliminate staking from their proposals to avoid similar legal challenges.

The SEC’s classification of staked ETH as a security hinges on applying the Howey Test, which determines whether an asset qualifies as an investment contract. According to the SEC, staking involves investing money when users lock up their ETH in exchange for potential returns, meeting the criteria of the Howey Test. However, opponents argue that staking fundamentally differs from traditional investment contracts as it involves supporting network operations and earning rewards, which challenges the application of the Howey Test.

Critics of the SEC’s approach argue that enforcement actions against staking services lack clear guidance, creating regulatory uncertainty for crypto firms and investors. Moreover, the decentralized nature of many staking activities complicates the SEC’s assertion that stakers primarily rely on the efforts of others.

The exclusion of staking from Ethereum ETFs has raised concerns within the crypto community. Many investors value staking for the yield it generates, and its absence could diminish the attractiveness of Ethereum ETFs compared to direct Ethereum purchases, where investors can engage in staking activities.

In contrast to the US, Hong Kong’s Securities and Futures Commission (SFC) is considering allowing staking for Ethereum ETFs to enhance their attractiveness by offering passive income opportunities through staking.

The removal of staking from Ethereum ETFs is a strategic adjustment by ETF issuers to meet regulatory expectations and obtain approval, despite potentially reducing the attractiveness of these ETFs. Whether staking will be enabled in the future depends on the SEC’s decision on how to classify Ethereum and staked ETH in the coming weeks and months.