Fidelity Files for Spot Ether ETF amidst Tax and Regulatory Risks, SEC Defers Approval Deadline
Summary:
Fidelity has filed an S-1 application with the SEC to create a spot Ether (ETH) exchange-traded fund (ETF), which would allow it to stake part of its ETH holdings. The proposed ETF carries a number of risks including taxation of staking rewards, potential regulatory changes, and vulnerabilities in the Ethereum network itself. The approval deadline for the ETF, along with eight others, has been deferred to May 23 by the SEC.
On March 27, Fidelity made an S-1 submission to the United States Securities and Exchange Commission (SEC) to form a spot Ether (ETH) exchange-traded fund (ETF). Fidelity can stake a portion of their ETH holdings, following from a previous filing. The ETF would be traded on the Cboe BZX Exchange by the behemoth in asset management. Fidelity Digital Asset Services, an affiliate of sponsor FD Funds Management, would be entrusted with the custody of the trust's ETH, as revealed in the S-1. It aims to stake some of the Trust’s assets using one or more staking infrastructure providers. However, this decision brings with it increased risk, with the application acknowledging the potential for loss through "slashing" penalties and liquidity risks during the staking process. Staking gains would be considered income for tax purposes, hence prompting a taxable event for investors not linked to any distribution from the Trust. There is uncertainty surrounding the ETF's anticipated fees, with the custodian having discretion in the event of a fork in determining the fund's supported chain.
Several other risks associated with the ETF were identified in the form. Regulatory steps in the United States and globally could detrimentally affect the fund. The termination of the trust could be provoked by regulatory measures such as the SEC declaring the fund as an investment company under the 1940 Act, the fund being considered a commodity pool under the Commodity Exchange Act by the U.S. Commodity Futures Trading Commission, or being classified as a money service business according to the U.S. Treasury Department's Financial Crimes Enforcement Network rules.
Reports indicate that the SEC is probing the Ethereum Foundation, which pundits believe may influence the approval prospects of a spot ETH ETF. There have been instances of political resistance against spot ETH EFTs.
The Ethereum blockchain is also susceptible to a 51% attack, where a rogue entity could seize control of the network's governance via a majority vote. It is noted in the form that "the top three largest staking pools held close to 50% of the ether staked on the Ethereum network." With 31.5% of all staked ETH, Lido DAO is the largest ETH staking pool.
Analysts have suggested that the launch of a spot ETH ETF could diminish DAOs' power but could introduce new "concentration risk" dependent on the distribution of their ETH among stakers by ETFs.
The SEC has deferred the approval deadline for other ETH ETFs to May 23. Eight applicants are awaiting an SEC decision on their spot, ETH EFTs.
Published At
3/27/2024 8:21:15 PM
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