Fidelity’s S-1 Application for ETH EFT with Staking

On March 27, Fidelity submitted an application known as an S-1 to the United States Securities and Exchange Commission (SEC). The purpose of this application is to create an exchange-traded fund (ETF) focused on Ethereum (ETH). Fidelity, a prominent asset management company, plans to give investors the opportunity to stake a portion of the ETH held by the ETF. The ETF will be listed on the Cboe BZX Exchange, and Fidelity Digital Asset Services will act as the custodian for the trust’s ETH.

According to the S-1 filing, the ETF intends to establish a program that involves staking a portion of the trust’s assets through various staking infrastructure providers. This decision comes with additional risks, including the potential for loss and liquidity risks during the staking process. The staking rewards generated by the ETF will also be considered taxable income for investors, resulting in a taxable event without a corresponding distribution from the trust.

While the application does not specify the expected fees for the ETF, it does highlight other risks associated with investing in the fund. Regulatory measures, both in the United States and globally, have the potential to negatively impact the fund. If the SEC classifies the fund as an investment company under the 1940 Act or the U.S. Commodity Futures Trading Commission views it as a commodity pool under the Commodity Exchange Act, these regulatory actions could lead to the termination of the trust. The fund could be considered a money service business under the rules of the U.S. Treasury Department’s Financial Crimes Enforcement Network.

The SEC’s ongoing investigation into the Ethereum Foundation may have implications for the approval of spot ETH ETFs, as it could influence their decision-making process. There has been political opposition to such ETFs focused on ETH. It is important to note that the Ethereum blockchain is susceptible to a 51% attack, where a malicious actor gains control over the network’s governance through a majority vote. The filing reveals that the three largest staking pools control nearly 50% of the ETH staked on the Ethereum network, with Lido DAO being the largest pool, holding 31.5% of all staked ETH.

Although the introduction of a spot ETH ETF could diminish the influence of decentralized autonomous organizations (DAOs), it also carries a new form of risk called “concentration risk.” This risk arises from the distribution of ETH among the various stakers chosen by the ETFs. The SEC has set a deadline of May 23 for approving other ETH ETF applications. Currently, there are eight applicants awaiting the SEC’s decision on spot ETH ETFs.