Ark and 21Shares modify Ethereum spot ETF with cash creation/refund policy

Ark Invest and 21Shares amended their joint application for a spot ethereum exchange-traded fund (ETF) in a February 7th 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 will not have access to in-kind creations and redemptions involving eth.

The corresponding section says:

“Authorized Participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Furthermore, 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 an ether counterparty (in that sense).”

Cash creations and redemptions were key to recent bitcoin spot ETF approvals and, as such, the same should be expected of ethereum spot ETFs. Although it is unclear why the US Securities and Exchange Commission (SEC) ultimately insisted on cash-based methods, some reports suggest that it is difficult for participants to handle cryptocurrencies under current US regulations.

Update also introduces eth staking

The latest filing also suggests that ETF issuers intend to engage 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 can generate rewards, which should be treated as income, doing so also carries a risk of loss.

Participation is not guaranteed in the final proposal. Scott Johnsson, MD at Van Buren Capital, He noted that this section is in square brackets and is uncertain. James Seyffart, Bloomberg ETF Analyst believes that Ultimately, the SEC will not allow gambling.

Amendment May Be Good News for eth ETFs

The amendment by Ark and 21Shares is a relatively positive development for ethereum spot ETFs. The SEC recently extended deadlines for several other eth ETFs, including those from BlackRock, Fidelity, Grayscale, and Invesco Galaxy. On the contrary, today's amendment suggests some degree of progress.

However, none of those developments change the fact that the SEC must decide 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 simultaneously.

Expectations surrounding the approval of an ethereum spot ETF are mixed. One Polymarket Prediction Market Reports ethereum-etf-approved-by-may-31?tid=1707336152563″>43% chance of an approval in May. Seyffart believes there is a 60% chance of approval, while a JP Morgan insider believes there is a 50% chance. Standard Chartered Bank expects an approval in May, while TD Cowen does not expect an approval in 2024.

While it is unclear if the latest news has affected investor sentiment, ethereum (eth) has gained slightly more than the 24-hour market average. eth is up 1.9%, the cryptocurrency market is up 1.5%, and bitcoin (btc) is up 1.3%.