ARK 21Shares has recently adjusted its application for a spot ethereum exchange-traded fund (ETF), moving toward a cash creation model similar to its previously approved spot bitcoin ETF.
The strategic amendment archived on February 7 also includes plans to potentially stake a portion of the ETF's Ether (eth) holdings, with the goal of generating additional income through staking rewards.
This move follows the company's successful transition of its bitcoin ETFs to a cash creation and redemption model in December after entering into talks with the US securities regulator.
The transition from an in-kind reimbursement model, which used non-monetary payments such as btc, to a cash creation model marks an important strategic shift. Under the new model, ARK 21Shares will purchase Ether corresponding to the order amount and deposit this Ether with the custodian, resulting in the creation of ETF shares.
Eric Balchunas, Senior ETF Analyst at Bloomberg Intelligence, highlighted this change, stating: “It looks like they were updated to just be cash creations and a few other things that align it with the recently approved btc Spot ETF prospectus.”
The adaptation is seen as a move to closely align the Ether ETF with regulatory preferences demonstrated in the approval of bitcoin ETFs.
However, adopting the cash creation model may impact arbitrage transactions made by authorized participants, which are crucial to keeping the ETF share price in close correlation with the market price of Ether. This complexity underscores the nuanced balance ETF issuers must strike between regulatory compliance and market functionality.
Additionally, ARK 21Shares' latest S-1 filing introduces the concept of staking a portion of the ETF's Ether holdings through “one or more trusted third-party staking providers.” While this proposal aims to harness the revenue-generating potential of staking, it is accompanied by notable risks, such as the potential for Ether losses through shortings and the requirement that staked Ether remain locked for extended periods.
The proposal to include betting in the ETF structure has sparked debate among industry observers. Financial lawyer Scott Johnsson noted that the gambling-related paragraphs in parentheses suggest the proposal is tentative and subject to regulatory dialogue.
Echoing this cautious stance, James Seyffart, another Bloomberg ETF analyst, expressed skepticism about the SEC's willingness to allow participation in Ether spot ETFs, stating: “But time will tell.”
The SEC's decision on several spot Ether ETF applications, including those from ARK 21Shares, VanEck, Hashdex, Grayscale and Invesco, is eagerly awaited, with a series of deadlines extending from May to August 2024. However Seyffart anticipates a class action decision on May 23, mirroring the SEC's approach to bitcoin ETFs earlier on January 10.
The ARK 21Shares ETF filing amendment has not only sparked debates about regulatory compliance and innovation in the ETF space, but has also influenced market dynamics. Following the announcement of the updated presentation, the price of Ether saw a notable increase, surpassing $2,400 and setting a two-week high.